Global Investing Hot Spots

A flood of upcoming elections around the globe could wreak havoc on the financial markets

Supporters of Turkish President Tayyip Erdogan react during an election rally in Diyarbakir, Turkey June 3, 2018.
Umit Bektas | Reuters

This year has been fraught with volatility in financial markets as investors fret over tighter monetary policy, rising inflation and tensions surrounding global trade. But another factor could make markets even more volatile: elections around the globe.

Key elections in Mexico, Turkey, Brazil, Colombia and the United States are scheduled to take place later this year, and they could have ripple effects across global financial markets amid a rising trend in populism.

Populist candidates in Mexico and Brazil are leading the polls, increasing the possibility that those countries could take more extreme stances on matters such as trade and security.

Investors have already faced turbulence stemming from an election this year.

In Italy a government coalition was formed last week by two anti-establishment parties, the Lega and the Five-Star Movement. The newly formed government raised eyebrows after nominating Paolo Savona — a Euroskeptic — to become Italy's next economy minister.

The move, which was rejected by President Sergio Mattarella, sparked concerns that Italy could leave the European Union as well as a spike in global-market volatility. Italian bonds plummeted last month, while the Italian FTSE MIB index dropped 9.2 percent. Spanish stocks also saw increased volatility, recording seven moves of at least 1 percent in May, while German stocks posted six. The euro also fell 2.5 percent against the dollar last month.

Investors are also feeling the pinch from election risks coming from emerging markets as those fears help send those stocks and currencies lower. On Thursday, Brazilian stocks fell more than 5 percent, while the broader iShares MSCI Emerging Markets ETF pulled back 1.3 percent. The decline in emerging markets sent the S&P 500 lower on Thursday as investors pulled money out of U.S. stocks and into bonds.

In the United States, Wall Street is keeping an eye on this year's midterm elections amid fears that Democrats could get a majority in the House, thus making it harder for Republicans to move forward with their economic agenda.

"Investors don't like uncertainty, and elections certainly bring that," said Chris Gaffney, president of world markets at TIAA Bank.

Below we break down the upcoming elections and examine the risks they present to investors.

Mexico — July 1

Leftist front-runner Andres Manuel Lopez Obrador of the National Regeneration Movement (MORENA) is greeted by supporters after a campaign rally in Tlapa de Comonfort, in Guerrero state, Mexico June 7, 2018.
Gustavo Graf | Reuters

The Mexican general election is scheduled to take place on July 1, and leftist Andres Manuel Lopez Obrador is the clear favorite to become Mexico's next president.

A poll conducted by Mexican daily Reforma between May 24 and May 27 showed 52 percent of voters would choose Lopez Obrador — better known as AMLO — to become the country's next president, up from 48 percent in late April. Parametria, a polling agency based in Mexico City, found AMLO's preference among voters grew to 45 percent in late May from 38 percent earlier in the month.

Fearing that his growing lead in the polls could indicate his Morena party may also win a majority in the legislature, investors dumped Mexican stocks throughout May. The S&P/BMV IPC index plummeted 7.6 percent last month, its biggest one-month decline since February 2009. The iShares MSCI Mexico exchange-traded fund — which tracks Mexican stocks — plunged 13.4 percent last month, its largest monthly loss since September 2011.

Investors fear that and AMLO victory coupled with a majority in congress would leave the doors wide open for the leftist to move forward with his agenda, which some fear could cripple the economy. Some of AMLO's proposals include giving free access to telecommunication services like the internet and doubling the pension for the elderly.

AMLO's rise to the top of the polls and the fall in Mexican equities come as Mexico continues negotiations with Canada and the United States on a new trade deal. President Donald Trump has railed against the current deal, NAFTA, calling it the worst ever.

"There is concern that, with NAFTA negotiations ongoing, AMLO calls Trump's bluff and actually pulls out of the negotiations," said Peter Donisanu, a strategist at Wells Fargo. People are worried that AMLO will come in "and make the country more isolationist."

U.S.-Mexico trade relations have intensified recently after the Trump administration last week slapped its neighboring country with tariffs on steel and aluminum goods. Mexico issued retaliatory tariffs of its own, targeting pork and cheese goods, among others.

Turkey — June 24

Supporters of Turkish President Tayyip Erdogan during an election rally in Diyarbakir, Turkey June 3, 2018.
Umit Bektas | Reuters

In Turkey, the electoral situation is a bit more muddled. The Middle-Eastern nation is scheduled to hold a general election on June 24 in which President Tayyip Erdogan is expected to be re-elected. The contest is taking place much earlier than in the normal election cycle after Erdogan called for snap elections in what many consider to be a power-grab move.

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However, the chances of Erdogan's AK Party maintaining a parliamentary majority are a coin toss at this point. A recent poll conducted by pollster Sonar showed the AK Party winning 42.2 percent of the vote, while its ally party — nationalist MHP — is expected to receive 7.1 percent of votes.

Meanwhile, the poll found the main opposition party — the Republican People's Party (or CHP) would get 39.5 percent of votes, and the pro-Turkish Peoples' Democratic Party garnering exactly 10 percent. Political parties in Turkey have to get at least 10 percent of the vote in an election in order to hold seats in Parliament.

This is important because Turkey will move to a government system which expands the powers of the presidency, regardless of the outcome. That transition could be made more complicated without an outright majority in parliament following this contest, however. Erdogan himself acknowledged last month that his party needed a majority "until the new system is fully functional."

The AK Party "is still very strong. However, they made a tactical error," said Marcus Chenevix, an analyst at TS Lombard. "Politics in Turkey are much more entrenched than they are in America. We'll quite likely see a scenario of political paralysis if the current polls are to be believed."

"With a country facing an economic crisis, this the worst time for that," Chenevix said.

The Turkish economy has been in turmoil this year as the country cannot keep its currency, the lira, from free-falling against the U.S. dollar. For 2018 the lira has dropped more than 20 percent versus the greenback. The drop has also pushed equities in the country sharply lower. The iShares MSCI Turkey ETF has plunged about 27 percent for the year. With the election ahead, investors better brace for more turbulence as the upcoming election could exacerbate the decline.

"Turkey has now reached a point where it will have a hard landing one way or the other," said TS Lombard's Chenevix.

Brazil — Oct. 7

Ciro Gomes, pre-candidate for Brazil's presidency, attends a presidential debate in Brasilia, Brazil June 6, 2018.
Adriano Machado | Reuters

Brazil's election was broken wide open earlier this year after Luiz Inacio Lula da Silva, the former president better known as Lula, was sent to jail to serve a 12-year sentence for bribery.

Prior to that, Lula had a double-digit lead in the polls. But taking the widely popular politician out of the picture has led to a more polarized contest.

A poll released Tuesday by Data Poder360 found that far-right candidate Jair Bolonsaro and center-left populist Ciro Gomes leading the polls.

"Because the electorate is so disappointed with the establishment given the Lava Jato, there is an added layer of uncertainty heading into this election," said Lisa Schineller, primary credit analyst at S&P Global. "Whoever wins, it's going to be a question of what their political mandate is and how much political capital they have."

Schineller noted that, while Brazil has recovered from the economic swoon that was triggered by the oil-market collapse in 2015 and early 2016, Latin America's biggest economy still faces a massive fiscal deficit which could pressure the economy once more.

Brazil's pension was a contributing factor in Brazil's deficit rising to 10 percent of GDP in 2015. Current President Michel Temer pushed to reform it, but failed.

"They've curtailed discretionary spending, but not non-discretionary spending. Given the current political climate, … we do not expect that to change," Schineller. S&P downgraded Brazil's credit rating to BB- from B earlier this year.

Brazilian stocks, which were stalwarts among emerging markets in 2016 and 2017, are down sharply this year as investors grapple with the political and economic uncertainty surrounding the country. The iShares MSCI Brazil ETF has dropped more than 14 percent this year, while the Bovespa index has pulled back about 8 percent.

United States — Nov. 6

U.S. markets also face election risk as Democrats appear primed to gain seats in the House and possibly a majority.

"Investors are trying to price that in," said James Ragan, director of wealth management research at D.A. Davidson. "The Senate seems to be gyrating a bit."

"If the Democrats get control of one of the Congress chambers, it makes it harder for Republicans to move forward with their agenda," Ragan said.

The U.S. stock market has surged dramatically since President Donald Trump's election. Under the Trump administration, corporate taxes have been slashed and large amounts of regulation have been done away with. The U.S. economy has also been clicking on all cylinders, with jobs growth remaining strong and unemployment near levels not seen in years.

However, Trump's protectionist stance on trade has sent jitters through Wall Street recently.

Trump unveiled a 25 percent charge on steel imports and a 10 percent tariff on aluminum in March. Last week the United States slapped those tariffs on Mexico, the European Union and Canada, three key trade partners that had been previously exempt.

The move has left investors on edge as fears that a full-blown trade war between the United States and its trade partners could lie ahead.

Mexico released this week its own set of tariffs, targeting U.S. steel, cheese and pork. Canada also plans to slap dollar-for-dollar tariffs on the United States, according to Chrystia Freeland, the country's minister of foreign affairs. The EU also threatened to retaliate with tariffs of its own.

The tariffs, along with other policies undertaken by the Trump administration, could factor into some of races.

D.A. Davidson's Ragan noted that the midterms are "something that could cause some volatility in the market," but added that investors should recover from any volatility spike given the strong U.S. market and economic fundamentals.

The electorate will vote on 35 of 100 Senate seats, 36 gubernatorial races, as well as all 435 House seats.

Colombia — June 17

Colombian voters are scheduled to vote for their next president on June 17 in a runoff election that features two completely different candidates.

On one side, right-wing candidate Ivan Duque is running on the promise of lower taxes and cutting government spending. On the other side, leftist Gustavo Petro wants to increase pensions and provide free health care for Colombian citizens.

"It's an important election in the sense that both candidates support very different policies," said Alberto Ramos, head of Latin American Economics at Goldman Sachs.

A poll conducted by YanHaas released this week shows Duque as the frontrunner in the runoff, with 52 percent of support.

"If the polls are wrong, we could see a volatile reaction in markets, given the differences in policies embraced by the two candidates," said Ramos, who added that the market had started to price in a Duque victory after the May 27 first round.

The Colombian peso has risen 1 percent against the dollar since then, while the Global X MSCI Colombia ETF (GXG) has gained more than 3.5 percent.