The importance of elections to financial markets can sometimes be overrated. In many instances, new governments, once in power, exercise some self-restraint, softening their more radical positions during their campaign. Alternatively, newly elected governments can face congressional, institutional, or social constraints that limit the extent to which they can alter policy significantly. These are reasons for investors to keep politics on their radar screens, but not to overreact to them.

But politics can be noisy indeed. Take this past year as an example. The election of market-friendly President Jair Bolsonaro has given investors hope for improved fundamentals in Brazil on the heels of proposed pension reform, lighter regulation, and the opening up of the economy, to name a few of his priorities. By contrast, Mexico has received the opposite treatment as investors feel that President Andrés Manuel López Obrador (AMLO) is implementing anti-business policies that will be detrimental to growth.

For emerging markets, 2019 will be another year rich in potential leadership turnover. We will witness important elections in Thailand in March, India from April through May, Indonesia in April, South Africa in May, and Argentina in October, among others, which have the potential to move markets. To help our clients navigate this heavy political calendar, we are introducing our second Emerging Markets Electoral Monitor, where over the coming months we will keep tabs of developments in countries holding consequential elections and assess their potential implications. You can follow our updates within the pages of our monthly Investing in Emerging Markets   report. We hope you continue to both enjoy this monitor and find it useful in your investment decisions. To kick off this year‘s monitor, we provide a short summary on the elections we're keeping an eye on:

Thailand: For the first time since taking power through a coup in 2014, the Thai military junta has called for democratic elections, scheduled for 25 March. At stake are all 500 seats of the House of Representatives and 250 Senate seats indirectly chosen by the junta. All members of both chambers will then elect a prime minister. The junta needs to win only 126 of the 500 house seats to secure a majority. With many new voters expected to cast their ballots, an anti-military party is gaining popularity and may pick up seats in the lower house. But even if the junta fails to secure a house majority, it could still influence reform through the senate. For this reason, we do not expect the elections to bring much change in Thai fundamentals. The junta would likely move to keep incumbent Prime Minister Prayut Chan-o-cha in his position.

Indonesia: For the first time in the country‘s history, the general elections will include voting for the People‘s Consultative Assembly. As it stands, incumbent President Joko Widodo (Jokowi) has a lead in the polls in a rematch of the 2014 presidential elections against Prabowo Subianto. Our base case of Jokowi securing a second and final presidential term would be positive for markets as it would mark continuity of policy that has helped Indonesia achieve annual GDP growth of around 5% in the last several years. But Jokowi‘s reelection is not certain, with 50–60% of voters supporting him, 30– 40% backing Subianto, and 20% undecided. A Subianto win would likely raise uncertainty around the continuation of Jokowi‘s policies.

India: The recent state elections showed a slip in popularity for the BJP, the party of sitting Prime Minister Narendra Modi. With general elections not too far off, the results do not bode well for a repeat of the BJP‘s stellar performance in the 2014 elections. To regain support after the bruising state vote, Modi has announced some populist reforms. Should the BJP retain its large majority, it could ensure policy and reform continuity and mitigate investors‘ concerns. Other scenarios range from a BJP-led coalition to a government led by a coalition of smaller parties. Any of these scenarios would likely mean more uncertainty in policy and reform and thus some loss of market confidence.

South Africa: The ruling ANC is likely to retain a majority and incumbent President Cyril Ramaphosa looks set to stay in office. More important, however, is the magnitude of the victory as it would determine the legitimacy of the president‘ s reform plans and his ability to see off factions still aligned with his predecessor Jacob Zuma. Our base case assumes a strong enough voting share of around 60% to allow Ramaphosa to continue his reform push. A victory for the ANC below this threshold could harm Ramaphosa‘s standing and consequently his efforts to push on with reform, ultimately weighing on South African assets.

Argentina: Markets will focus on the outlook for the October presidential race, which in our view remains binary. It will result in either economic policy continuity—i.e., fiscal consolidation toward a primary fiscal surplus, tight monetary policy to rein in inflation, and a cooperative relationship with the IMF—or a return to the populist policies of the past. Given currently available information, we work with a base case of policy continuity for three main reasons: 1) the macroeconomic stabilization plan in place since late 2018 seems to be working; 2) external factors are likely to remain supportive; and 3) corruption investigations against former President Cristina Kirchner are likely to deepen. Our favorable view on Argentina‘s electoral outlook is far from guaranteed, however, and the country‘s macroeconomic conditions will remain challenging post-elections no matter who wins.

Author:

Alejo Czerwonko, Emerging Markets Strategist Americas, UBS Financial Services Inc. (UBS FS)  Brennan Azevedo, Emerging Markets Associate Americas, UBS Financial Services Inc. (UBS FS) Tilmann Kolb, Analyst, UBS Switzerland AG

Appendix

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