It used to be said that one of the distinguishing features of investment debate in developed markets versus emerging markets was that politics does not matter in developed. Obviously, any under that illusion have stood corrected in the aftermath of the Trump presidency in the US, Brexit in the UK and post-global financial crisis political swings across Europe.
There are a number of important elections scheduled for 2022 that will go towards shaping the investment climate in emerging markets:
Large emerging markets: general elections in Brazil and Korea, state elections in India, and the party congress in China;
Small emerging markets: general elections in Colombia, Hungary, Kenya and the Philippines; and
Developed markets: US mid-term congressional, France presidential and parliamentary,
By their nature, election outcomes are not easy to predict, although we do scan the latest polling data where available. Investment risk resulting from any change in government is certainly worth considering and we do this for all of these elections below.
The possibility for temporary disruption is greatest in Brazil and Kenya, a new face with new policies is most likely in Colombia and South Korea (whether they can implement them is a different matter), the least change (from an investor perspective) is likely in China, India, Hungary, and the Philippines, and ripples across the EM universe are likely to be felt, as always, from the French and US elections.
Large EM: Brazil, China, India, Korea
Brazil (2 October)
The president (with a second round, if needed, on 30 October), national legislature (congress), state governors and legislatures, and federal district legislatures are all due to be elected.
Leading leftist, opposition candidate, Lula, currently leads rightist incumbent, Bolsonaro, by a wide margin (from 10pp in the 11 November Exame-Ideia poll to 27pp in the 6 November Quaest-Genial poll).
The legislature is highly fragmented, with the Liberal party, which Bolsonaro recently joined, directly controlling merely 8% of seats in the lower house, and the Workers' Party of Lula directly controlling merely 10%.
Given the disappointment on fiscal reform, and indeed the descent into fiscal populism and inflammatory rhetoric, under Bolsonaro, and the benign performance of equities during the last Lula presidency, albeit during an era of buoyant prices for Brazil's commodity exports, a Lula win should not necessarily be viewed as a negative catalyst. In any event, whoever wins the presidency will have to strike compromises with a broad range of parties, perpetuating Brazil's challenge to enact structural reform.
The 20th National Congress of the Chinese Communist Party is due towards the end of 2022, during which delegates will elect the seven-member Politburo Standing Committee (five new members in 2017), 25-member Politburo (15 new members in 2017), and the 204-member Central Committee (126 new members in 2017), among other party leadership bodies.
The resolution to reinterpret party history at the November 2021 Central Committee meeting, following only those under Mao Zedong in 1945 and Deng Xiaoping in 1981, likely paved the way for Xi Jinping's third presidential term from 2022 to 2027 and the preservation of his power thereafter (whether he retains the formal 'paramount' leadership of the party, military and presidency, or not).
Xi remains key to the Chinese investment case, particularly now that the shock of his policy shift to "common prosperity" has passed. In the very unlikely event that his supremacy, and the party patronage network he heads, be seriously challenged then any transition is unlikely to be orderly, given how entrenched his position has become.
India Uttar Pradesh (February-March)
Seven state elections are due, with the most important being those for Uttar Pradesh in February-March, both in its own right and as a pointer to fortunes in the next general election, which is due before May 2024.
Uttar Pradesh is India's largest state. It accounts for 17% of the population, 15% of the lower house of the national parliament and 13% of the upper house. Proportionate to the US electoral college it could be thought of as the equivalent of Texas and Florida, or of California and Pennsylvania.
Uttar Pradesh is currently dominated by Prime Minister Modi's ruling BJP, with an absolute majority of 77% of seats on its own, but this was not always the case (eg after its electoral collapse in 2002, its share of seats ranged 12-22% until 2017).
The continuing legislative majority of Modi's BJP is a key piece of the investment case in India because its stuttering reform efforts are unlikely to be matched by a diverse opposition and this outweighs the undoubtedly widening social fractures under the BJP.
South Korea (9 March)
The president is due to be elected (incumbent Moon Jae-in is restricted to a single term).
The leading conservative opposition candidate, Yoon Seok-youl of the People Power party, currently leads centrist candidate, Lee Hae-myung of the Democratic party, by 10-13pp (according to Realmeter and ARC polls from 10 November).
The unicameral legislature (national assembly) does not come up for re-election until April 2024; currently, the Democratic party directly controls 56% of seats and People Power controls 34%.
Therefore, there is a high risk of poor relations between the executive and legislature should Yoon win the presidency.
Korea's largest equities are in the Technology Hardware sector and tend to be driven more by global demand than local politics. However, should the more conservative Yoon Seok-youl win, then relations with hardware supply chain partner Japan are likely to deteriorate.
Small EM: Colombia, Hungary, Kenya, Philippines
Colombia (13 March and 29 May)
The lower and upper houses of congress are due to be elected on 13 March. The president is due to be elected on 29 May. If there is no majority winner in the first round, then a runoff second round (19 June) takes place between the two leading candidates.
Prior to the presidential election, inter-party primary elections, also on 13 March, should consolidate the support of the left, centre and right of the political spectrum behind three leading candidates, respectively.
Incumbent rightist President Duque cannot stand for re-election because of the single-term limit. The combination of the corruption investigation into and house arrest of former President Uribe, who is the de facto leader of the largest party, DC, in the rightist ruling coalition, the grievances over inequality and insecurity, resulting in deadly protests in April-May 2021, and the economic fallout from the Covid crisis led to incumbent rightist President Duque's approval ratings dropping to below 20% in H1 21 (Invamer) and have likely derailed the prospects of successor rightist candidates in the presidential election.
Net approval ratings (9 September, Centro Nacional de Consultoria and Semana) are highest for centrist candidates like Galan (+13%), Fajardo (+4%), Gavria (+2%) and Gutierrez (0%) and lowest for far-left candidate Petro (-13%) and rightist candidates, such as Cabal (-24%) from the current ruling CD party.
This suggests that a consolidated centrist base could support the winning candidate, the 10% increase in the size of the voting population since 2018 from the younger section of the population may be a demographic tailwind for the centrist camp, and that the least market-friendly candidate, far-leftist Petro, is likely still too too polarising to win.
Petro was the losing 2018 presidential candidate (25% and 42% of votes in the first and second rounds, respectively), a former Bogota mayor (2012-16) and a former M-19 guerilla. He advocates policies such as higher taxation and reform of land ownership.
Congress is fragmented and this is likely to remain the case after the next election, reining in the policies of any ultimate presidential winner. The current ruling CD party is part of a 51% governing coalition in both houses of congress but it directly controls merely 19% and 18% of the lower and upper houses, respectively.
The unicameral parliament is due to be elected.
Incumbent Prime Minister Victor Orban of the ruling right-wing Fidesz-KDNP coalition, which controls 67% of seats, is seeking a fourth consecutive term since 2003. Diverse opposition parties have coalesced under the United Opposition umbrella, currently controlling 26% of seats, and are led by Peter Marki-Zay. Fidesz-KNDP enjoys a comfortable 14pp opinion poll lead over the opposition (Nezopont poll from 3 November).
The Hungary election has repercussions for the EU, with Hungary and Poland, two of the largest emerging market recipients of EU net expenditure (amounting to 3% of GDP in Hungary in 2020), effectively challenging the primacy of EU law over national law and EU rules on rules on LGBTQ rights and media freedom.
The main policy distinction between Orban's Fidesz-KDNP and Marki-Zay's United Opposition is on relations with the EU, with the latter advocating joining the European Public Prosecutor's Office (which can investigate fraudulent use of EU funds) and euro adoption in the long term (Marki-Zay has ruled out the interim step of Hungary entering the ERM-2 mechanism before 2026).
In the highly unlikely event that Fidesz-KDNP loses its parliamentary majority, Hungary may see a transition to tighter fiscal control, a change in the operating environment for private sector interests with close ties to the current ruling party, and a potential revision of large scale nuclear and rail projects announced under Orban with Russia and China.
Kenya (9 August)
The president, both houses of parliament, and county governors and assemblies are due to be elected. In the event that no presidential candidate wins over 50% of the vote or does not get 25% of the votes in at least 24 (out of 47) counties, then there is a runoff round two between the two leading candidates.
The ruling Jubilee coalition has been openly divided since early 2018 between President Kenyatta (comprising mainly the Kikuyu ethnic component, the 'Kieleweke' camp) and Vice President Ruto (comprising mainly the Kalenjin ethnic component, the 'Tangatanga' camp).
Kenyatta, who is restricted by the two-term limit from seeking re-election, and the candidate who has been on the opposing side in the last three elections, Raila Odinga, are effectively united in order to prevent Kenyatta's ally in the 2013 and 2017 elections, current Vice President William Ruto, from winning the presidency.
The Rift Valley region, which Ruto continues to dominate, accounts for 25% of registered voters, and is the largest single region. In a presidential system this makes Ruto a key player, as candidate or kingmaker.
However, the constitutional reform proposals put forth by the government, under the Building Bridges Initiative, would have introduced the post of prime minister and moved Kenya towards a parliamentary system, and the greater allocation of the budget for local government, would have degraded the importance of the central executive (ie 'all' shrinks in the 'winner-takes-all' system). In that scenario, Ruto and the Rift Valley are less important.
These proposals were blocked by the high court in May and confirmed after an appeal in August. The government has filed an appeal at the supreme court.
In an opinion poll (13 October, Mizani Africa) in the Mount Kenya region alone, an area accounting for 5% to 10% of the total population, Ruto and his UDA party scored 58% and 62%, respectively, and Odinga and his ODM party scored 27% and 22%, respectively.
An intensely competitive election does not mean a repeat of the violent disruption of 2007. There was intense competition, controversy and disputes in 2013 and 2017, as well, but also the ultimate arbitration of the Supreme Court was respected (albeit not agreed with) by all sides and violent disruption was very limited.
There appears to be no material differences in macroeconomic policy between any of Kenya's leading politicians or political parties. But political division is likely to remain intense enough to obstruct structural reform and increase the risk of fiscal slippage.
Philippines (9 May)
The president, vice president and 12 senators (half of the upper legislative house) are due to be elected. All posts are elected on a first-past-the-post basis (ie the winner simply has the highest vote count, not necessarily a majority, and there is no second round). The vice president is elected distinctly from the president (ie the two winners could be from different alliances or parties).
Incumbent President Duterte cannot stand for re-election because of the single-term limit. In August, he signaled his intention to contest the separately elected vice presidential seat, but withdrew his candidacy at the start of October. He ultimately decided to contest a seat in the senate.
His political heir Sara Duterte, who was the politician with the leading opinion poll standing, with a 14pp lead, prior to the presidential nomination period, is running for the vice presidency in alliance with presidential candidate Bongbong Marcos (son of former dictator Ferdinand Marcos).
Moreno (the mayor of Manila) and Marcos scored 25% and 23%, respectively, in the last published opinion poll (26 October, RPMD) before the finalisation of nomination papers (15 November), a difference equal to the pollster's estimated margin for error.
There is no observable difference in policy between the different candidates – they wish to pursue structural reform domestically, where vested family corporate and military interests allow, and balance the US and China in foreign policy (security and oil and gas exploration).
At most, the election may fragment the majority coalition that Rodrigo Duterte has enjoyed during his tenure because of multiple candidates who appeal to the voter base that elected him in 2016; eg Marcos, Moreno, Pacquiao, Go and Lacson. But, because of the concentration of executive power within the presidential office, this is likely of little consequence to the eventual winner.
Developed markets: France and US
France presidential and parliament elections
France (April and July-August). The president is due to be elected, with a second-round runoff (24 April) between the two leading candidates should the winner fail to secure a majority in the first round (10 April). After the expiry of its current term at the end of June, an election for the next national assembly (lower house of parliament) is due within two months.
Incumbent centrist President Macron currently enjoys 24% support in opinion polls (11 November, Politico), a 7pp lead over far-right candidate Le Pen and, in a second-round runoff scenario, he is polling 56%, a 12pp lead. Macron's winning second-round vote in 2017 was 66%.
Over the past year, Macron's support has been stable, whereas Le Pen's has fallen (in a first-round scenario) from c25% until June 2021 to 17% currently (roughly equal to Zemmour, a markedly more radical right-wing protagonist, who has yet to declare his candidacy but has clearly struck a popular chord).
Should Macron win re-election, then obviously the status quo in terms of France's policies likely persists:
EU – including support for the substantial receipts of net EU expenditure enjoyed by the likes of Croatia, Hungary, Greece, Poland and Romania, which were in the range of c2% to 4% of GDP in 2020;
Immigration – France is a key source of remittances for Morocco and Tunisia;
North Africa – open trade and capital flows with Morocco and Tunisia and support at the IMF for Tunisia
Sahel region of Africa – military intervention in the Sahel region to counter Islamic State militants and secure French access to gold and uranium deposits; and
Lebanon – support should a government less influenced by Hezbollah ever emerge.
However, a disruptive change may occur should the far-right secure the presidency. While Le Pen has watered down her previous calls to revise EU treaties, if she needs to corral the extreme right support base tapped into by Zemmour then this may change with a likely attempt to reverse the foreign policy direction of Macron.
In the current national assembly, Macron's coalition, centred around LREM, controls 47% of seats, while Le Pen's RN has merely 1%. This means that a far-right president likely faces "cohabitation", or split government, which, in turn, may moderate some of their policy reversal pledges.
US mid-term congressional elections
In the US, should Democrats lose control of the US Congress in mid-terms, the following are potential consequences:
A loss of control of the legislature might impede the infrastructure investment plans of the Biden administration and therefore detract from global growth prospects (particularly for hard commodities demand).
President Biden may turn his focus to foreign policy where executive leeway is greatest, and that may mean:
Doubling down on friction with China (eg on trade and capital flows, Taiwan and ASEAN, and on climate change);
The renegotiation of the Iran nuclear deal (although whether Iran would treat him as a credible negotiator with re-election looming in 2024 is another matter);
Trumpeting, however hypocritically, human rights (with respect to Egypt, Saudi Arabia and Turkey, for example).
Repairing relations with Canada and Mexico within the USMCA trade and investment framework (eg resolving disputes related to Mexico's support for state-owned enterprises in the electricity sector or US tax credits for domestically built electric vehicles).
The probability of the return of Trump in 2024 goes up, with attendant concerns for US relations across the emerging markets; eg a return to less predictable and more overtly transactional foreign policy, an escalation of tariffs in trade with China, frostier relations with traditional allies in NATO and the EU, and visa restrictions for Indian IT services staff in the US, but also the potential for a pro-growth, lower US corporate tax environment.