Having been an oasis of calm amid the emerging market rout in 2018, India has had a dismal run in recent months. While other emerging markets have powered ahead, India has been laid low by fears that its reform agenda could be derailed by upcoming elections. Are those fears justified? And could there also be risks for other Asian nations facing elections this year?
Emerging markets have been on an exciting ride since September of last year. Not only are emerging market indices up by over 10%, but they have performed well at a time when developed markets were struggling. This is rare; emerging markets are usually seen as a warrant on global growth.
The one exception has been India. The Indian market is around 11% behind the wider MSCI Emerging markets index for the year to date. Part of the problem has been the upcoming elections scheduled to be held in seven phases from April 11 to May 19. While there has been little doubt that the current Prime Minister Narendra Modi would be returned to power, the fear has been that a smaller majority would impede his ability to enact reform.
Ewan Thompson, co-head of emerging markets at Neptune, said: “India was one of the better performing emerging markets under the period of quantitative easing in the West. It has had a good domestic reform story under Modi and the Bharatiya Janata Party (BJP). At the end of last year, polls emerged suggesting there would be a close finish in the elections. This would result in a coalition where further reforms could be difficult.”
The oil price was also an issue. India remains dependent on external sources of oil. As the oil price rose in the first half of 2018, there were concerns that this would derail India’s punchy economic growth, currently running at over 7% a year.
Short-term volatility
However, the more recent spat with Pakistan over the Kashmir militant attack seems to have bolstered support for the government once again. Equally, Ian Hargreaves, co-head of Invesco Asian & Emerging Equity team, believes the concerns over a weaker Modi government may have been over-played: “There may be some short-term volatility should the BJP return without a convincing majority, but there is not likely to be any significant change in economic policy. Any election-related market volatility is not likely to detract from the strength of India’s longer-term macro outlook and growth prospects.”
India has already achieved significant reform, the effects of which are starting to be felt today. From the Goods and Services tax, which has reduced the cost of doing business, to the demonetisation episode, which brought money out of the black market and into the mainstream economy, to efforts to tackle corruption, Modi’s reforms have boosted the Indian economy. The most important step from here is infrastructure spending and the capital investment cycle, says Thompson.
Thailand and Vietnam could prosper
Thailand has had its own problems. Its elections – the first since the military coup seven years ago – did not bring a definitive result, with two parties claiming the right to govern and the electoral commission refusing to announce the official result. The system had been heavily rigged in favour of the military and polling data was erratic. However, fund managers believe the country’s economic growth will remain undisturbed. Orsen Karnburisudthi, a manager on the Aberdeen Thai investment trust (ANW), pointed out that the dictatorship has presided over strong economic growth and all the emerging candidates have a pro-business agenda and recognise the importance of continued growth in the Thai economy. The country has dealt with political uncertainty for some time.
For Indonesia, the outcome of the election looks clearer. Incumbent President Joko Widodo still commands a strong lead over challenger Prabowo Subianto. Both are promising more jobs, stable prices and higher economic growth, and the election appears to offer little scope for any major surprises.
In the end, it more likely to be other factors that determine the success or otherwise of these economies. Hargreaves says: “With both a fiscal and a current account deficit, last year’s relaxation in dollar strength and fall in oil prices which triggered market turbulence actually proved beneficial to India. The domestic economy is also perceived to be less sensitive to ongoing US-China trade disputes, an issue which has impacted on other regional markets.” Countries such as Thailand and Vietnam may be beneficiaries of the ongoing trade dispute, as companies move manufacturing away from China to alternative cheap labour locations.
Ultimately, the Asian elections will create some noise in financial markets, but the results are unlikely to derail the growth story for the countries themselves. Asia appears to have self-sustaining growth, whatever the political weather.
