06 December 2017, 14:48 GMT
I’m often asked what distinguishes Emerging Markets (EM) from Developed Markets (DM). There is no ‘right’ response to this question and one could point to a country’s GDP/Capita, nominal GDP growth or asset price volatility for clues to the answer. For me however, the best definition comes from the political scientists at Eurasia Group who define EM as “a country where politics matters at least as much as economics to the markets”.
Seasoned EM watchers will be very familiar with the nuances of politics in our world and its impact on asset prices. Over the years we’ve witnessed numerous shock election results, unexpected regime shifts and political earthquakes all of which can lead to significant swings in a country’s policy trajectory, reform agenda, economic performance and relationship with creditors. The next 12 months are set to be no different with the election cycle peaking in around 20 major EM countries.
In Latin America politics will be pivotal with key elections in 8 countries which account for around 80% of regional GDP. Two votes in particular will dominate the market’s focus and attention. In July, Mexico will decide its new President for the next 6 years. Currently the colourful left-wing candidate Lopez Obrador is ahead in tight polls which is unsettling both the establishment and investors, although Margarita Zavala (Independent), Jose Antonio Meade (PRI) and the as yet unknown PAN candidate will all provide credible alternatives. Later in the year in Q4 Brazil will also vote for its next leader with a wide range of diverse potential outcomes. So far the campaign has been noted for potential candidates pulling out of the race, leaving left-wing former President Lula, right-wing former military officer Jair Bolsanaro and PSDB stalwart Geraldo Alckmin as the leading protagonists. Elsewhere the region will also see pivotal presidential elections in Chile, Colombia, Costa Rica, El Salvador and potentially Venezuela.
In the CEEMEA time zone the most important vote will be in South Africa where the ANC party congress in mid-December will decide its next leader, which will help shape the outcome of the 2019 national Presidential elections. In Eastern Europe, powerful and popular incumbent leaders in Russia and Hungary will expect to be easily re-elected, resulting in policy continuity and minimal reforms. The Middle East has been a hotbed of political tension in recent years and 2018 will be no different with key elections in Egypt, Iraq, Lebanon and Palestine. By comparison the Asian election calendar is relatively light with nationwide votes due only in Pakistan, Malaysia and Thailand.
The macro outlook for EM at present appears healthy with robust growth, supressed inflation and improving current account balances. The EM election cycle however will undoubtedly bring plenty of unexpected political twists over the coming 12 months, resulting in heightened market uncertainty and asset price volatility. These events will help shape the trajectory of the asset class throughout the year and provide agile and well-informed investors with a rich set of alpha generation opportunities.