Indonesia, Brazil markets to catch election fever?

Can Jokowi be 'Indonesia's Modi'?

Indonesia stocks could catch the election fever enjoyed by India's equity markets in the run-up to Narendra Modi's win at the south Asian nation's election in May, says Morgan Stanley, but Brazilian stocks might not experience the same euphoria.

The two emerging market (EM) giants are bracing for national elections – Brazil in October and Indonesia in July – and hopes are high that their share markets might see similar gains relished by their developing peers who had elections this year.

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The MSCI India, for example, rallied 11.7 percent relative the MSCI EM Index in the three months prior the Bharatiya Janata Party opposition leader Modi's victory on May 16, and 5.4 percent in the one month before, Morgan Stanley observed. Meanwhile, the MSCI South Africa gained 8.1 percent versus the MSCI EM index in the three months before the incumbent African National Congress party won elections in May, compared with 1.46 percent in the one month before.

According to the investment bank, emerging markets usually rise 3.1 percent in the one month prior to elections. But the extent of the gains would depend on whether it's a case of a clear leading candidate, which will boost stocks, or if an opposition party claims power, which will trigger an even bigger rally. Neck-and-neck races tended to lead to underperformance, Morgan Stanley said in a recent report.

For Indonesia and Brazil, Morgan Stanley is predicting different outcomes for both stock markets, with big gains tipped for the former.

"If the market shifts again to factor in a popular-opposition victory, MSCI Indonesia could outperform EM by around 10 percent in the run-up to the election," said Morgan Stanley in the note.

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A group of supporters holding red banners of Joko Widodo, governor of Jakarta and presidential candidate, wait to greet Widodo as he arrives for an election campaign in West Java province, Indonesia.
Dimas Ardian | Bloomberg | Getty Images

Indonesia's presidential election, scheduled on July 9, is shaping up to be a tight contest between Governor of Jakarta Joko Widodo and ex-General Prabowo Subianto. Although Widodo emerged as the clear front runner at the start of the year, his support has waned after his party only acquired 19 percent of the vote in the parliamentary elections.

Morgan Stanley found that this 'neck-and-neck' scenario has led to losses of 14 percent for MSCI Indonesia against the MSCI EM over the past 14 weeks, but said a last-minute shift towards Widodo – leader of the popular opposition Indonesian Democratic Party of Struggle – could spur a 10 percent rally.

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Brazilian elections, however, set for October 5, are unlikely to trigger similar gains for equity markets, the bank said.

This is largely because incumbent President Dilma Vana Rousseff looks likely win the vote despite declining popularity ratings in recent months amid weak economic conditions, a scenario that's not conducive to big market gains.

"Moreover, we see other downside fundamental risks to Brazil from the perspective of the economy and equity valuations," the banks added.

Post-election gains?

As for how the markets will perform post-election, Morgan Stanley is less positive. Based on historical performance, elections in emerging nations tend to boost stock markets by an average 0.3 percent relative to the SMCI EM in 30-days after the vote.

"The history of other EM elections, as well as current relative valuations and positioning suggests that India is unlikely to enjoy further sustained outperformance versus EM," the note said. "We advise clients to follow a "trust but verify" approach on the structural reform agenda to be rolled out under the country's new leadership looking in particular at the upcoming budget."

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