The last month has seen elections across three large emerging markets – India (voting during May), South Africa (vote on 29 May), and Mexico (vote on 2 June).
Mexico
Claudia Sheinbaum was elected the first woman President of Mexico, with a landslide victory of ~60% of the votes beating President Andrés Manuel López Obrador’s (AMLO's) ~53% of the votes in the last election. Sheinbaum is AMLO’s current protégé and the vote is for continuation of his mandate - the two are aligned on policy, are both pro-industry with the main difference being that Sheinbaum has a greater focus on the environment (e.g. she is pro renewable development, lithium extraction, and energy downstream investment). Sheinbaum did not digress from AMLO’s agenda and policies during the campaign.
Markets had anticipated this victory, but the landslide vote share was a surprise. Markets reacted negatively on the outcome, with both the currency and the stock market declining. Because it is likely that Sheinbaum's Morena party will have more control over congress, this could result in fewer checks and balances. The results mean the government have a supermajority (a two-thirds majority) in the chamber of deputies and it will be easier for it to pass policies that require constitutional change. However, for the other chamber, the senate, the latest results indicate the Morena party will fall narrowly short of a supermajority, and only achieve a simple majority - which we believe will be a positive surprise for markets.
Markets will be closely watching as cabinet announcements begin and when the new congress is installed in September. It is important to say that Sheinbaum is pro-industry, and the country continues to benefit from positive top-down drivers, including a strong currency (despite the recent sell-off in the peso), prudent monetary policy and the structural trend of nearshoring. In Sheinbaum’s victory speech, she also reassured listeners that there would be fiscal discipline, an autonomous central bank, amiable relations with the US, and importance placed on attracting FDI - we see this as a positive indication that she is talking to investors and showing she cares about this stakeholder group.
South Africa
The African National Congress (ANC) party lost its parliamentary majority for the first time since taking office in 1994. The polls indicated that the ANC would get between 43% and 44% of the vote - in the end, they achieved 40%. This was down to the impact of the previous president Jacob Zuma's newly launched uMkhonto we Sizwe party (MK party) which achieved 15% of the vote. What this means is the ANC will likely seek to form a coalition with another party. The ANC is in talks with parties and the market currently favours the centrist Democratic Alliance (DA) which secured 22% of the vote and is nervous of the MK or the left-leaning Economic Freedom Fighters (EFF) which achieved 9%. Markets and the currency declined following the result.
The two most positive outcomes would be 1) a DA coalition and 2) a Government of National Unity (a pro rata division based on votes/seats). A coalition with the MK or EFF could hurt market sentiment; however, any deal between the MK and ANC would be difficult and indeed they have said they would not do a coalition. We take some comfort from the constitution which has been very resilient over many years.
South Africa continues to benefit from many positive drivers - although GDP growth remains muted, it has demonstrated resilience despite adversity, and there are a number of important dynamics at play that support the outlook. Structured reforms will likely accelerate future economic growth; for example, we have already seen loadshedding and power shortages improving. Interest rates are high with the central bank having been appropriately hawkish, which has helped bring down inflation. The Treasury has also been able to contain the fiscal deficit and debt, and higher commodity prices should also be supportive given that commodities are the bedrock of the economy. We will be closely watching the ANC’s talks with the other political parties in the days ahead.
