Presidential Elections Aren’t the Only Important Ones

Our Global Chief Economist takes stock of recent elections in India, Mexico and South Africa -- and what they suggest about the market implications of the upcoming UK and US elections.

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Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about recent elections and upcoming elections and what they mean for the economy.

It's Tuesday, June 11th at 10am in New York.

Markets usually prefer simple narratives, but this week it's shown us that simplicity can be elusive. In particular, for elections, legislative outcomes can be more complicated but are consequential. Here in the US, clients often ask about the economic implications of a Trump vs. Biden presidency -- but we immediately have to flag that the congressional outcome has to be a big part of the conversation.

Indeed, three important elections in the past weeks have emphasized the importance of a legislative focus. But the surprise was not in who won -- rather, in how big the legislative decisions were.

In India, Prime Minister Modi was re-elected, but his BJP party lost its outright majority. Exit polls on June 1st had predicted a resounding victory for the BJP, prompting a rally in the lead up to the final results.

The results surprised markets and caused a reversal. Markets have since recovered to roughly where they were before the exit polls,

We expect policy predictability with the continued focus on macro stability. This focus implies moderate inflation, smaller primary deficits, along with support for domestic manufacturing and infrastructure in upcoming years. Those have been the core of our view that the Indian economy is set for continued expansion.

The Mexican election was almost the reverse, where the winning candidate's party won far more votes than was expected. In response to the news, equity markets sold off and the Mexican peso depreciated. Scheinbaum was largely expected to win after the endorsement of Obrador; but by winning a supermajority, the market focus turned to Mexican fiscal discipline based on a view that there may be less restraint on government spending.

Fiscal policy has been in focus for us because for the first time in recent years the government there ran a fiscal deficit. While the party has sought to reassure markets, concern has mounted regarding the risks of fiscal slippage without a more balanced legislature.

Compared to India and Mexico, The South African market reaction to the election was modest, though not for a lack of surprise in the legislature. The ANC lost more of its majority than polls had predicted, which narrows the options for a coalition. The market now expects a more reform-oriented coalition to take power and support a continued improvement in the economy. For example, frequent power outages had impeded the economy for a long time, but the energy sector now appears to be more stable, and those sorts of reforms can help catalyze an improved economic outlook.

Examples of India, Mexico, and South Africa have reinforced why we've remained focused on the upcoming general elections in the UK, and also the congressional outcomes in the US. In the UK, a change in government is predicted by the polls, and fiscal considerations will be in focus.

So back here in the US, the fiscal outcome will largely be determined by the congressional results. To meaningfully change federal tax or spending requires legislation. And our colleagues in public policy research have flagged that under a Republican sweep, they expect lower taxes and higher spending; contrasted with a Democratic sweep that might bring somewhat higher spending, but also higher taxes leading to a narrower deficit.

A split government, where the party in the White House not the same as the party controlling each of the Houses of Congress, however, probably implies more muted outcomes. While we should focus on the legislative outcomes, there are important authorities, of course, that the President can exercise independently of the Congress.

So, when we highlight the importance of the legislative outcomes, we are not denying the criticality of the presidency.

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