​With polls round the corner, EMs could underperform top markets

ET Intelligence Group : For emerging markets (EM), political risk is resurfacing with Brazil, Indonesia, Mexico, India and Pakistan facing either national or crucial provincial elections. As an asset bloc, EMs underperformed developed markets by 5% since the beginning of the year. With political volatility adding to the list of negatives led by a liquidity crunch and an escalating trade row, EMs could be in for a prolonged period of below-par performance.

Bloomberg’s Emerging Market Political Risk Index rose to 59.4, the highest since at least June 2016 when a surprising Brexit outcome fuelled a global wave of risk aversion. EM funds witnessed outflows of $4.5 billion in February, the first monthly outflow since November 2016 and the EM market capitalization shrunk by $2 trillion. EMs’ borrowing costs — measured by the average yield spread over the US treasuries—reached 302 basis points, the highest since mid-November.

Mexico, Hungary, Egypt, Brazil, South Africa and Pakistan will face general elections in the next nine months. The market is pricing in regime changes in Mexico and South Africa, while the incumbents are tipped to remain in power in Hungary, Pakistan and Egypt. India and Indonesia will have critical provincial elections later this year, and the outcomes will weigh on the general elections of 2019.