• Investment Management

Why Investors Are Now Using Their Money to Vote For New Emerging World Leaders

Something new and surprising is shaping the way stock markets pick winning economies.

In the September/October issue of Foreign Affairs magazine, Morgan Stanley portfolio manager Ruchir Sharma wrote an article describing the influence of politics on global markets. The following are excerpts from the article (click here to read the full article)

Sharma on “hope rallies” in stock markets:

“As political leadership has come to seem more and more important to economic growth prospects, stock market hope rallies have grown increasingly common, especially this year, which is an unusually busy one for elections. Of the world’s 110 emerging democracies, 44, including six of the largest, have held or will hold national ballots in 2014.

“Not all these contests have affected the markets: where there was little expectation that elections would oust entrenched rulers, as in South Africa and Turkey, the markets largely ignored the campaigning. But in countries where promising newcomers gained momentum, the markets paid close attention. In Indonesia, what analysts called a “Jokowi rally” began last December, when polls started forecasting that Joko “Jokowi” Widodo would be the next president, and the rally continued through his victory in July. India experienced something similar—a Modi rally—starting the day Narendra Modi was confirmed as the opposition candidate for prime minister last September and continuing after his victory in May.”

Sharma on politics’ suddenly outsized influence on markets:

“Why has politics suddenly started to exercise so much influence over financial markets? The answer starts with the breakdown of economic growth models that had come to rely too heavily on the high commodity prices, low interest rates, and other global windfalls of the last decade. When the times were good, many leaders neglected to keep pushing reforms and to invest profits wisely. As a consequence, their nations are now struggling to sustain growth. Three of the biggest commodity-exporting economies, for example—Brazil, Russia, and South Africa—have seen their GDP growth rates collapse to about one percent or less this year and their inflation rise to around six percent. That’s made investors especially alert for signs that new leaders with new ideas might emerge.”

Sharma on how markets can view entrenched governments in a negative light:

“Just as stock markets have grown finely attuned to signs that new leaders could produce economic revivals, so, too, have they learned to read the signs of decay that usually follow, as successful leaders grow too self-satisfied to continue pushing for change. Over the last two decades, the stock markets of emerging-market countries with new leaders have typically beat the developing world’s average stock market returns by about 20 percentage points during those leaders’ first terms, then tracked the average closely in their second terms, and then fallen by about six percentage points below the average in their third. Such third terms are rare, but they offer at least anecdotal evidence of how markets tend to spurn aging regimes.”

Get Your Career Started At Morgan Stanley