BlackRock and JPMorgan Find Value in Emerging-Market Elections

Carmen Reinicke
BlackRock and JPMorgan Find Value in Emerging-Market Elections

(Bloomberg) -- For all the market uncertainty wrought by presidential campaigns in the developing world, there’s a surprising strength in some countries in the countdown to election day.

In the month before the 11 main emerging-market elections in 2018, currencies rallied by an average of 1.1 percent while stocks gained 2 percent, according to data compiled by Bloomberg. About half of those countries saw gains in the month, in a year where most emerging-market stocks and currencies fell sharply. Investors who bought Brazil’s benchmark stock index and the Czech koruna pocketed particularly big gains -- 9.5 percent and 7.1 percent respectively.

“If an investor has some insight into the fundamentals of the country, culture and is able to read through all the polls, definitely they can use this uncertainty as an opportunity,” said Josephine Shea, senior portfolio manager at BNY Mellon in Boston.

Presidential elections can be especially hair-raising for an asset class buffeted in recent months by everything from the strength of the dollar to slowing global growth and trade tension between the world’s two largest economies. Add to that the recent ascent of populist candidates and market jitters are understandable. Yet, for those who can stomach the gyrations, data show a strategy that can lead to gains in choppy markets.

Take Brazil’s election in October. Three months before, the real fell 13 percent in a matter of weeks. But it regained that ground in the final weeks before Jair Bolsonaro claimed victory. Stocks followed a similar pattern: The Ibovespa Index index declined in August, bottomed in September and then soared in the run-up to the election as Bolsonaro’s plans to overhaul the nation’s pension program spurred market optimism.

Some investors expect the pattern to continue through a number of high-profile elections coming up in 2019. They have a close eye on the markets in India, Ukraine, Argentina, Indonesia and South Africa, where residents all head to the polls in the next few months.

“By and large our favorite region right now in terms of upcoming elections would be Asia,” said Isabelle Mateos y Lago, chief multi-asset strategist at BlackRock Investment Institute in New York.

Within the region, BlackRock’s top picks are Thailand and Indonesia, given their solid fundamentals. Still, the Thai baht and the nation’s benchmark stock gauge haven’t offered the most alluring returns in the run-up to yesterday’s vote.

India may be a winning trade, said Rashmi Gupta, a money manager at JPMorgan Chase Bank in New York. The nation’s election starts next month. Gupta said emerging-market election risks have presented one of the best buying opportunities.

Ukraine also has an election starting this month, on March 31. It’s the nation with the biggest upside -- unless former prime minister Yulia Tymoshenko wins, said Delphine Arrighi, a money manager at Merian Global Investors. Mateos y Lago said she doesn’t expect a dramatic outcome and still has a constructive view on the country.

Some nations are in the spotlight long before voting begins. Argentina has seven months to go before its October election, yet it’s already politically risky given the dramatic gap in policy direction between the two most probable contenders, according to Shea. Argentina could have plenty of downside if former leader Cristina Fernandez De Kirchner were to return to power, and lots of upside should Mauricio Macri be reelected, Arrighi said.

Mateos y Lago said elections can provide an opportunity for investors to add risk, especially in places with solid fundamentals. That should be even more true in 2019, given the more positive backdrop for emerging markets.

“You have to form a view on what’s going to be the direction of travel after the election,” Mateos y Lago said. “You need a view on the fundamentals, and that’s always going to be the key driver.”

--With assistance from Ben Bartenstein.

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