The year of the ballot

Our thoughts on the election result

Ultimately, both the current Democrat presidency and Trump have had a mixed market impact in their respective terms, and our team has navigated the uncertainty through a focus on bottom-up best ideas that complement the overall top-down view the team has through the market cycle. We will continue to adopt this approach.¹

The short-term reaction to the election result has seen market participants price key themes/outcomes related to Trump’s expected policy path:

• An anticipated rise in growth and inflation, led by the US economy, is evidenced by rising yields in the US Treasury market – relating to higher fiscal spending and deregulation – and the US dollar strengthening. This has boosted high-yielding asset markets (pushing down credit spreads in riskier parts of the bond market).
• Concerns around trade tariffs have caused some European and Asian markets – primarily manufacturing-heavy economies – to underperform.
• An expected shift in gear on the geopolitical front has boosted Ukrainian and Israeli bond prices, reflecting the view that Trump will try to expedite peace deals with the respective regimes.

On tariffs, markets seem to be in wait-and-see mode. While Trump’s rhetoric on tariffs has been tough and alarming, what happens in practice is yet to be seen, making it difficult to gauge – and price – the size and scope of eventual tariffs. That the market reaction has not been stronger makes sense in the context of Trump’s previous term in office: what he threatened differed significantly from his eventual policy, including the trade relationship with China.

It is also important to note that Biden’s administration upheld many of Trump’s trade policies, meaning markets and economies have had eight years to adjust to a more protectionist US regime and markets have largely positioned for an ongoing tense relationship between China and the US. Broadly, almost a decade of US protectionism and increased polarisation of the global economy is not a new theme and global supply chains have already adjusted. Furthermore, China’s domestic policy is more important for the country’s economic growth than any policy moves by Trump. However, it will be important to monitor potential exemptions to trade tariffs for the most exposed economies, including Mexico and parts of Central and Eastern Europe.

In that vein, and crucially for active investors, even if trade is squeezed in some emerging markets, others will benefit – outside of South-East Asia, parts of Central America are already benefiting from nearshoring, for example. These trends look set to continue; the risk is that there’s a shock around the scale of protectionism and the size of tariffs.

The path of the dollar

As noted above, the market’s short-term reaction to Trump’s ‘America first’ policy is seen via the continuing strength of the US dollar. A strong US dollar is not helpful for emerging market assets, but it is something investors have been dealing with for a decade now.

Longer term, the path of the US dollar is less certain and likely to be less linear, not least because of the many contradictions in Trump’s policy agenda and parts of his administration that are actively calling for a weaker dollar to boost the domestic manufacturing sector.

Portfolio positioning

The short-term outlook – reflecting growth-friendly policy in the US and continued easing in global liquidity conditions – favours higher carry and higher yielding markets. We are taking a selective approach in FX markets given the uneven impact of tariffs and uncertainty around these. In rates markets, there are still plenty of economies where combination of high real (inflation-adjusted) interest rates and benign inflation outlook means that EM cutting cycles across select markets is likely to continue into 2025, creating a positive outlook for bond prices in these markets into 2025.

Our thoughts on election result

Modi’s BJP party surprised the market by not managing – by some margin – to secure a majority, returning India to coalition politics. Modi’s plans to form a coalition government in a National Democratic Alliance with two smaller parties seem likely to succeed, meaning the worst case scenario is likely to be avoided. It’s far too early to determine the impact of this result as we await many important developments in the coming days and weeks. The most obvious signposts to watch out for will be who is appointed to the key ministries and the revised budget, which will be presented in July. An opposition with a much larger voice than before and a government relying on the goodwill of coalition partners means greater checks and balances on all aspects of policymaking. The question will be whether this helps rather than acts as a hindrance to effective policymaking.

For local currency sovereign debt, we expect the market to trade more cautiously until greater clarity is provided on appointments to key ministerial positions, and then the budget. We retain our neutral view on Indian debt. We have become less constructive on the currency (reflected in a neutral view). While the election result has driven up volatility in India’s corporate bond market, we maintain a positive long-term view given strong corporate fundamentals and beneficial structural tailwinds, particularly in the energy transition space.

Our thoughts on election result

South African financial markets have been volatile since the election – with the associated dislocation in pricing creating opportunities for active managers. However, the trend has been upward overall, driven by the agreement to form an unprecedented GNU, which prompted a significant recovery as market-unfriendly tail risk scenarios were avoided. The coalition will see the ANC retaining key positions in the cabinet that would allow it to continue rolling out its key policies while sharing power with other parties; for instance, markets welcomed the news that Enoch Godongwana has maintained his position as the finance minister.

The focus now has shifted to the GNU and its ability to implement reforms that are needed to put the economy on a sustainable path. We have a constructive view on the country’s hard currency debt as we expect the Ramaphosa presidency to re-engage with structural reforms and introduce fiscal rules to help restore debt sustainability.

Our thoughts on election result

While Claudia Sheinbaum’s victory in the presidential election was largely expected, the scale of her win (securing 59.3% of the vote) took the market by surprise, as did her party’s strong showing in Congress.

The Morena party has secured a ‘super’ (two-thirds) majority in the lower house and just short of this in the Senate (where it should find it relatively easy to get the necessary support of a few senators from other parties). That will allow the party to push through amendments to the constitution. Sheinbaum’s predecessor, Andres Manuel Lopez Obrador (‘AMLO’) presented a number of reforms in February but lacked the necessary majority in Congress. Top of investors’ concerns are:

• Reforms the judiciary, essentially moving to a system where judges are elected. The judiciary has played a key role in preventing some of AMLO’s reforms from going ahead, so this would further weaken checks and balances.
• Reforms to the National Electoral Institute. This has been a target of AMLO, but so far he had been unsuccessful in weakening this independent institution.
• A pension reform, which could significantly raise the fiscal burden of providing much higher pensions.
• A minimum wage reform, ensuring that increases in minimum wages at least keep up with inflation. This would increase the persistence and stickiness of inflation.

This led to a sell-off, particularly in local markets and especially in the Mexican peso. We have moved to a more cautious view on the peso, which we expect to remain under pressure when AMLO’s reform plans get pushed through in September – as is now expected. We remain cautious on the outlook for Mexican sovereign bonds – we already had concerns over a deteriorating fiscal position this year, which will be difficult for the next administration to adjust, and sticky inflation is preventing the central bank (Banxico) from being more aggressive in its rate cuts.

While the election result may drive up volatility in Mexico’s corporate bond market, we maintain a positive long-term view given strong corporate fundamentals and structural tailwinds that benefit both exporters and domestic producers.