With viral risks seemingly in abeyance, politics is rearing its head again in EMs. The electoral calendar, though light by historical standards, is likely to preoccupy markets and could have profound geopolitical consequences.
The expiry of presidential term limits means new presidents will take office in Korea, the Philippines and Colombia by the end of the year. Battles over ideology or policy should play a minor role in most of these electoral contests (outside Latin America), with personality and political machines the decisive factor.
Hungary & Poland: Bonfire of the autocrats?
Elections in Eastern Europe next year, with Hungary’s scheduled for the spring and a possible snap election in Poland, could reduce populist influence in eastern Europe. Right-wing governments led by Viktor Orban in Hungary and Mateusz Morawiecki in Poland benefit from a pliant media and a strong campaign machine. However, they face robust opposition from credible centrist leaders with a strong electoral appeal, with Péter Márki-Zay facing Orban and Donald Tusk battling the right-wing coalition in Poland.
The success of these opposition parties will depend on their ability to work across ideological lines. In Hungary, the United Opposition combines far-right white supremacists and metropolitan liberals with no shared ideological or policy platform. In Poland, Tusk must build an alliance with left-wing parties hostile to his pro-business centrism. Though the odds are against an upset in both countries, the task before opposition groups is hard but not impossible.
Korea & the Philippines: Tentatively seeking Washington
In March, South Korea elects a replacement for outgoing liberal president Moon Jae-in. Conservative Yoon Seok-youl, supported by young voters aggrieved by high property prices, looks set to claim victory. Substantial legislative change is unlikely to follow, as the liberals control parliament, but a conservative president would push Korea closer to the US stance against North Korea and China.
A similar westward turn could also follow in the Philippines, where Ferdinand Marcos Jr. (son of the dictator) is the leading candidate for the presidential election scheduled for May. By combining his own political machine with that of Sarah Duterte, the daughter of ruling President Rodrigo Duterte, we believe Marcos is well positioned to take the presidency.
A Marcos presidency would largely continue the Duterte-era pursuit of foreign direct investment (FDI), in our view, while rowing back the previous administration’s controversial war on drugs. We expect Marcos would also become more passive on US-China tensions – a change from Duterte’s more pro-China position. With the region’s politics in a tenuous position, alignment with the US will be gradual but no less welcomed in Washington.
Colombia & Brazil: Left turn ahead
After two years of political ructions across Latin America, a test for the region will come from elections in Colombia and Brazil, which could widen the region’s leftward turn into the presidency in both countries.
In Colombia, unpopular centre-right president Iván Duque has been unable to recover politically from his aborted attempt at tax reform after widespread street protests earlier this year. While primaries for Duque’s replacement remain open, left-wing senator Gustavo Petro has the highest standing among a crowded field. Victory for a leftist, given Colombia’s fraught fiscal situation and the country’s high exposure to foreign investors, would leave the country vulnerable to capital flight.
However, we believe the most consequential election in 2022 will be in Brazil, scheduled in October. Ruling right-wing president Jair Bolsonaro, weakened by his poor handling of the coronavirus crisis and frustrated in his reform agenda by a divided congress, is facing a significant challenge from former left-wing president Luis Inácio Lula de Silva. Investors are watching as Brazil has accelerating inflation and the highest public debt ratio of all major EMs, both factors threatening real returns. The contest will likely be fierce, with investors fearing a Lula presidency would scrap the remaining fiscal controls.
We believe the electoral tests faced by EMs next year, alongside tightening monetary conditions, will reward a selective approach to investing in the EM space. Relative asset values remain attractive across EMs, in our view, but political changes will add another dimension for investors to consider.
Political uncertainty, where it exists, will continue to raise the bar for our entry into EM equities or bonds, but we will monitor the situation closely.