Unlocking potential opportunities in emerging markets – Global X ETFs

More than 40% of the world's population, more than half of global GDP and nearly 80% of global market value will go to the polls in 2024, setting the stage for a year filled with political headlines, volatility and potential change.^1,2 History tells us that politics can have a big influence on both a country's economy and stock market outlooks, as emphasized by recent developments in Greece and Argentina. The 2024 election cycle will be very decisive, as geopolitical tensions continue to rise, and we see both growing polarization and continued economic uncertainty. Despite expected volatility, we see room for optimism, particularly in emerging markets (EMs).

Key takeaways

• Several key elections are due to take place in 2024, and their results could have a major impact on the economic and stock market outlook across a wide range of emerging and developed economies.
• The 2024 election cycle will bring both volatility and opportunity to emerging markets, which should benefit active managers.
• Recent results in Greece and Argentina underscore the impact politics can have on a country's stock markets.

The transformative power of politics was shown in 2023

Greece and Argentina held crucial elections in 2023, with both countries electing their pro-market candidates. In Greece, citizens re-elected incumbent Prime Minister Mitsotakis for a second term after his New Democratic Party won a majority in the Greek parliament. Mitsotakis and his administration have been instrumental in implementing the Greek economic recovery, reforms and other pro-market policies that paved the way for Greece's sovereign credit rating to be upgraded to investment grade late last year.³ In Argentina, the people firmly rejected Peronism and elected the neoliberal Javier Mili as president. Since then, Miley has moved quickly to normalize the economy, passing a series of measures aimed at reducing government spending and returning the economy to orthodoxy. Markets rewarded these favorable political outcomes, with the MSCI Greece and MSCI Argentina indices returning 48% and 67%, respectively, in US dollars in 2023.⁴ The examples of Greece and Argentina emphasize the importance of politics to both economic growth and equity performance. Looking ahead to 2024, we identify similar opportunities in emerging markets.

2024 EM elections: Divergent trajectories underline the benefits of active governance

• India: The world's largest democracy will hold elections in the spring of 2024, which could be a significant potential booster for the stock market. Early forecasts predict that PM Modi's strong and market-friendly record will lead him to another victory.⁵ Modi, who has led the country since 2014, has been successful in implementing key reforms such as demonetisation and market deregulation, helping to unlock significant economic growth. Ahead of the April/May (yet to be officially set) national elections, the current outlook gives us hope that Modi and his Bharatiya Janata Party (BJP) can successfully retain control of the Lower House for three main reasons. First, inflation remains a key issue for voters, and Modi has moved quickly to squelch any rebound in food inflation, implementing measures to boost domestic supply and curb exports of some agricultural commodities such as sugar and rice. This, along with a weaker rupee, should pave the way for continued inflation and price stability in the first half of 2024. Second, we see more room for Modi to increase fiscal spending ahead of the election, with government revenue estimated to exceed the budget. About 0.6% of GDP in the current fiscal year (ending March 31).⁶ Finally, the BJT's performance in recent state elections provides further evidence of the wide range of popular support we observed during our visit to Mumbai in 2023 and indicated by Modi's 76% approval rating.⁷ While an opposition victory is not our base case, we do not see this scenario changing the strong demographic story that is key to India's investment case. As a result, we see a high probability of a market-friendly Modi victory as a result of the continuation of policies that have made India the best structural investment subject among emerging markets.

• Mexico: We favor Mexico's 2024 election because, while incumbent Morena's party retains control of the presidency, the party's candidate, Claudia Scheinbaum, is seen as more pragmatic than incumbent President Andrés Manuel López Obrador (AMLO). So, even with less market-friendly outcomes, we see an improvement from Mexico's current political environment.
• Taiwan: The country held presidential and legislative elections in January, with incumbent Democratic Progressive Party (DPP) Lai Ching-tae winning the presidency. We expect a continuation of current policies, while the DPP's minority in the legislature will lead to obstruction. As a result, the decision may be neutral from a geopolitical perspective, as Te is set to strengthen ties with the United States and further decouple Taiwan's economy from China. The Chinese response has been muted, with Beijing's focus on domestic economic issues limiting the potential for immediate expansion with Taiwan.
• South Africa: We expect high electricity bills and high unemployment to continue to weigh on the popularity of the African National Congress (ANC), paving the way for the party to lose its majority for the first time since the end of apartheid in 1994. It limits the ANC's ability to make progress on key power reforms, while also increasing the risks of the need to collaborate with smaller, more radical parties.
• South Korea: Following Yoon Suk-yeol's election as president in 2022, South Korea will hold parliamentary elections in April. This election cycle represents a pivotal moment for the current People Power Party (PPP) administration, which is looking to enlarge its minority in the National Assembly to further its agenda.
• Indonesia: Indonesians elected Prabowo Subianto as their next president, benefiting from sustained political stability and market-friendly policies throughout the two-term Joko Widodo presidency. Despite the leadership change, we expect a continuation of the pro-business agenda, with Prabowo Subianto promoting similar policies of the previous administration.

US presidential election

Consensus believes a 2024 Biden/Trump rematch is likely. However, widespread dissatisfaction with either candidate and growing support for Robert F. Kennedy Jr. could open the door for a third-party candidate to meaningfully enter the race. Some social issues such as immigration, the economy, government spending and abortion rights are top issues on voters' minds. In terms of direct EM implications, we expect both candidates to maintain their dovish rhetoric toward China, while Mexico may come up in immigration debates. However, we expect it to be more bark than bite, with limited concrete actions expected. On domestic policy, as in many election years, we expect little action from an already gridlocked Congress, with the government kicking most issues over to the next administration. We see this gridlock as negative for the US dollar, making us positive on emerging markets with the strong boost EM countries receive from a weaker US currency. We also note that EM stocks outperformed the S&P 500 index by a wide margin in the six-month period leading up to the last two US presidential elections. As a result, we remain bullish on emerging markets, which benefit from higher expected growth rates while valuations remain relatively attractive.

Conclusion: Emerging markets will be well positioned in 2024

The 2024 elections set the stage for a year full of political headlines, volatility and policy change. Recent results in Greece and Argentina underscore the impact politics can have on a country's economy and stock market outlook. We see India and Mexico as beneficiaries of the election results, while the results remain highly uncertain in the US, South Korea and South Africa. The US elections will result in a year-long congressional shutdown, while China and Mexico may come under scrutiny ahead of the US elections. However, we do not expect concrete policy changes. As a result, we see emerging market stocks stabilizing in 2024, while expected volatility may create opportunities for active managers.