A Week in Elections: South Africa, Mexico, and India

What were the outcomes of the elections and how did markets react?

In a series of historic votes over the past week, South Africa, Mexico, and India have delivered political upheavals that caught investors off-guard and roiled asset prices. Here is a recap of last week’s elections and their market impact:

South Africa

In the May 29th general election, South Africa's ruling party, the African National Congress (ANC), faced a significant setback, securing only 40.2% of the national vote—its worst performance to date. This ended the ANC's outright majority in parliament for the first time since taking power at the end of apartheid in 1994.

The ANC's decline was fueled by anger over rampant corruption, high unemployment, crippling power cuts, and a struggling economy. Former President Jacob Zuma's breakaway uMkhonto we Sizwe (MK) party clinched 14.6% of votes, while the far-left Economic Freedom Fighters (EFF) secured 9.5%.

With no party holding a majority, South Africa now faces complex coalition negotiations to form a new government. An ANC-led coalition propped up by the EFF's support is seen as the most likely outcome, though an alliance with the center-right Democratic Alliance cannot be ruled out.

Read more from my election preview here.

Market Reaction

At the market open after the election results, volatility ticked higher. The rand (ZAR) initially traded 0.3% weaker versus the USD in early trading after the election results, before recovering to gain 0.8% on hopes of a market-friendly coalition government

The initial weakness was driven by the uncertainty created by the inconclusive election outcome, with the ruling ANC failing to secure a parliamentary majority for the first time since 1994.

The Johannesburg Stock Exchange Top-40 index gained around 1.4% on the first trading day after the election. The yield on the 2030 benchmark sovereign bond fell 10.5 basis points on the back of strengthening bond prices. The prospect of forming a stable government coalition helped ease investor tension.

Mexico

In Mexico's June 2nd presidential election, Claudia Sheinbaum of the leftist MORENA party won a resounding victory with around 58% of the vote. More crucially, MORENA appears to have secured a two-thirds supermajority in both houses of Congress.

This gives the incoming Sheinbaum administration a free hand to potentially push through constitutional reforms without opposition support. Investors are wary that MORENA could revive outgoing President Obrador's stalled efforts to strengthen state control over key industries.

More specifically, Sheinbaum has pledged to continue the populist, statist policies of her predecessor AMLO. With a supermajority, markets fear she may double down on measures unfriendly to private investment.

This includes policies such as energy sector reforms that favor state companies over private/foreign firms. Her party's ideology leans towards greater state control of the economy.

Market Reaction

The Mexican peso plunged sharply, depreciating by around 4% against the US dollar on the day after the election results. The peso hit a 7-week low of 17.754 per USD, closing at 17.671, its weakest daily close since November 2023.

Mexican sovereign bond spreads widened modestly, with the JPMorgan EMBIGD index spread increasing by 6 basis points to 306 bps. The benchmark Mexican stock index (IPC) plunging 6.1% on the first post-election trading day, while the iShares MSCI Mexico ETF dropped 10.7%.

India

The BJP won 240 seats in the 543-seat Lok Sabha (lower house), remaining the single largest party but short of the 272 seats needed for a majority. Along with its allies in the National Democratic Alliance (NDA) coalition, the BJP-led alliance managed to secure 292 seats.

This is enough to form the government but with a much slimmer majority compared to expectations and the BJP's previous landslide victories in 2014 and 2019.

On the other hand, the opposition Indian National Congress party and its allies in the INDIA coalition performed better than anticipated, nearly doubling their tally to 234 seats and emerging as a more formidable opposition bloc.

With a thinner majority, Modi may face challenges in pushing through major economic reforms that require legislative changes, such as land and labor reforms, or ambitious targets like agriculture/power sector overhauls. The need to accommodate coalition partners could slow the reform momentum.

There are also concerns that the new government may be encouraged to loosen fiscal discipline and increase social spending on areas like farm subsidies, rural employment schemes, etc. to appease allies, potentially straining fiscal consolidation efforts.

Some of the BJP's core Hindutva ideological agendas, like changing citizenship laws or judicial reforms, could face greater resistance from coalition partners. Modi may need to moderate his stance on issues where allies disagree.

Market Reaction

Indian stocks suffered their biggest single-day drop since 2020 on June 4th as vote counting showed the BJP would fall short of a majority. The Nifty 50 plunged 5.93% and Sensex fell 5.74%.

The sharp sell-off wiped out nearly all the gains Indian stocks had made in 2024 so far. The Indian rupee also depreciated sharply, experiencing its worst drop in a year against the U.S. dollar. Bond yields spiked around 10 basis points as the market repriced expectations.

Markets had been pricing in and expecting a stronger BJP majority based on exit polls, allowing Modi to continue reforms unhindered. The reduced majority raised concerns about Modi's ability to push through his economic reform agenda and policy continuity.

There were fears that a coalition government could lead to more populist policies and fiscal slippage. Companies perceived as "Modi stocks" that benefited from his policies were hit hard, like Adani Group firms.

Outlook

A period of political instability now looms. In all three cases, the election outcomes exposed how emerging markets remain vulnerable to political shocks that can blindside investors. As these fledgling coalition talks and policy paths take shape, markets will be closely scrutinizing every move for clues on the future trajectory of these economic giants.