London - Elections from India and Indonesia to South Africa have calmed investors’ worst fears about political risk in emerging markets this year, but voting in Egypt and Ukraine and instability in Thailand and elsewhere are creating new concerns.
Polls in the so-called Fragile Five economies – Brazil, India, Indonesia, Turkey and South Africa – topped investors’ lists of political worries for this year.
As these countries were dubbed “fragile” because of their reliance on foreign investor flows to shore up government balance sheets, elections were seen as likely to lead to more spending and greater instability.
Presidential polls in Brazil and Turkey are still to come, but the results of parliamentary elections in India and South Africa and local elections in Turkey have been greeted with enthusiasm by investors.
In India, the result was a victory for the business-friendly opposition and in South Africa and Turkey there were strong performances by the ruling parties, who have shown some willingness to tackle problems.
Uncertainty remains ahead of a presidential poll in Indonesia, following parliamentary elections last month, but markets there are also relatively unscathed.
“So far, elections have not delivered what was feared: political uncertainty,” Jorge Mariscal, the chief investment officer for emerging markets at UBS Wealth Management, said. “So far, elections have resulted in better outcomes for [financial] markets.”
The outcome of October elections in Brazil may be less comfortable for investors as incumbent leftist President Dilma Rousseff has been gaining in the polls.
However, in all these markets, credit default swaps, often used as a proxy for measuring political risk, have fallen sharply. This also reflects a more positive view than six months ago on the extent of monetary stimulus in developed markets, which has kept US yields relatively subdued and supported high-yielding assets.
After falling 5 percent last year, emerging market equities have risen 4 percent this year, outperforming their developed market peers.
Brazil’s five-year credit default swaps, used to protect against default or restructuring of debt, have dropped almost 50 basis points this year, to 155 basis points, according to data provider Markit. That means it costs $155 000 (R1.6 million) a year for five years to insure $10m of Brazilian debt against default.
South Africa’s credit default swaps have declined by 30 basis points this year to one-year lows of 170 basis points, while Turkish swaps have dropped by 50 basis points, also to 170 basis points.
Instead, worries have switched to the outcome of this past week’s elections in Ukraine and Egypt, the security situation in Nigeria and last week’s coup in Thailand.
The flare-up between Ukraine and Russia, which led to the annexation by Russia of Crimea following the ousting of Ukraine’s pro-Russian president Viktor Yanukovich, has made investors wary about trading the two countries’ assets.
Ukraine’s credit default swaps have fallen from their highs but still trade not far below 1 000 basis points, a level representing distressed debt.
Across emerging markets, the challenge for post-election governments will be to carry out the reforms that markets expect, while keeping often restless populations satisfied.
“They have managed to win elections,” said Wood. “But it gets more and more difficult to fulfil promises and to tame the social pressures that have bubbled up.” – Reuters