Traders work on the Mizuho Americas trading floor in New York, U.S. (Photographer: Michael Nagle/Bloomberg)

Emerging Market Rebound Set for Political Tests: Elections Guide

(Bloomberg) -- There’s little doubt about the result of this weekend’s presidential election in Russia. But investors are preparing for less predictable outcomes in a slew of ballots looming in emerging markets from Brazil to Indonesia -- just as they cope with an historic withdrawal of liquidity.

The global end of easy money will challenge most markets, and the stocks, currencies and bonds of riskier developing nations are no exception. The bout of volatility that surged in early February saw almost $2 trillion wiped off emerging equities. While they’re on the rebound now, investors may be more prone to negative surprises as voters grapple with issues from widening inequality to social and religious tensions.

Emerging-market political risk has jumped to the highest since at least June 2016, according to the weighted average of GeoQuant indexes for 10 major developing nations. That was when the surprise Brexit vote triggered a (brief) wave of risk aversion across markets.

Emerging Market Rebound Set for Political Tests: Elections Guide

“Assets become more vulnerable” in the run-up to ballots, said Masakatsu Fukaya, an emerging-markets currency trader at Mizuho Bank Ltd. in Tokyo. “Foreign investors don’t like volatility and political instability, and they have a big influence on emerging markets. As each election approaches, we could see volatility go up in that country.”

Emerging Market Rebound Set for Political Tests: Elections Guide

The broader backdrop to the wave of elections is a steady normalization of Federal Reserve monetary policy, along with the likely end of European Central Bank asset purchases this year -- moves projected to send global borrowing costs rising further. Deepening trade tensions between the U.S. and China pose another risk to world growth. And stock valuations and bond premiums that once offered investors comfort are now looking less reassuring.

The MSCI Emerging Markets Index of shares has gained 1.2 percent in the past month, while the measure tracking developing-nation currencies has slipped 0.1 percent.

With that, here’s the timeline and points of focus for major elections coming up in emerging-markets through 2019:

Asia

Emerging Market Rebound Set for Political Tests: Elections Guide
Emerging Market Rebound Set for Political Tests: Elections Guide

EMEA:

Emerging Market Rebound Set for Political Tests: Elections Guide
Emerging Market Rebound Set for Political Tests: Elections Guide

Latin America:

Emerging Market Rebound Set for Political Tests: Elections Guide

“Mexico and Brazil’s elections are the ones that will really get the attention of the market this year,” said Kevin Daly, a money manager in London with Aberdeen Standard Investments, which oversees $900 billion.

In Daly’s view, the worst-case scenario would be victories for leftists Andres Manuel Lopez Obrador, known as Amlo, in Mexico and ex-President Luiz Inacio Da Silva in Brazil. The former, who leads Mexican polls, could restrict foreign investment in oil and gas. And while investors think Lula will be prevented from running due to graft allegations, he remains popular with Brazilians and may block a pension overhaul if he regains power, according to Daly.

Victory for the two upstarts “could impact emerging-market sentiment overall,” he said, especially if tensions between the U.S. and China over trade heat up at the same time.

©2018 Bloomberg L.P.