View short-term, election-related volatility through a long-term lens

While elections in France, India and Mexico have already delivered surprises and heightened policy uncertainty this year, surprise outcomes are unlikely to be as negatively impactful as investors think over the long term. In both emerging and developed markets, including the US, the stability of a country’s institutions is more important than changes in leadership, although there could be near-term volatility and investors should be wary of taking excessive risk.

In the approaching US presidential election, despite clear polarization in the two electoral bases, there are small differences between the two candidates in terms of domestic economic policy. From an investment standpoint, this matters less than elsewhere in the world, particularly some emerging market countries, where election outcomes could result in drastic policy swings.

A Trump administration might mean slightly less regulation; however, the Republican Party’s business-friendly stance is not as pronounced as in the past. Many US policies, such as the Inflation Reduction Act, are codified in law, with funds already distributed. It is unlikely that either party will want to roll back investments in semiconductor manufacturing for national security reasons, while broader infrastructure investments will likely boost economic growth.

The market reaction to the recent snap election in France was negative, given concerns that the far right and far left are gaining ground. This isn’t just a worry for this parliamentary election, but for future elections as well. The fiscal situation in France is weak, so with the promise of increased spending and tax cuts, bond spreads are increasing. Investing in French multinationals that are world leaders and derive their earnings from global operations, such as L’Oréal and Hermes, should alleviate many of the risks associated with French election results.

Despite the surprise of failing to achieve an outright majority, Indian Prime Minister Narendra Modi ultimately declared victory with the help of coalition partners. The BJP retained control of all key ministries, which should ensure the continuation of Modi’s push for infrastructure development across roads, railways, energy, and manufacturing. In our view, the coalition partners are supportive of central government policy although they will require additional support from their respective State constituencies. This should provide stability for the government’s agenda, which should bode well for businesses driven by momentum in infrastructure investment, including Power Grid Corporation of India, one of the largest power transmission utilities in the world, and APL Apollo Tubes, the largest producer of structural steel tubes in India.

In Mexico, the ruling Morena party gained a much larger number of seats than expected and fell only moderately short of a two-thirds supermajority in Congress. Markets are concerned that Morena will push through some controversial policies, such as constitutional reform, including the implementation of general election for judges to the Supreme Court, which is likely to result in medium-term institutional deterioration and increased legal uncertainty for firms operating in the country. There has been discussion of an additional tax on the banking sector, but the prospect of support for growth in minimum wages and broader social security programs should benefit consumption-related stocks, such as Femsa and Walmart de Mexico.