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Busy Election Season Adds Spice to Emerging Markets

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Twenty-three nations encompassing 40% of the world's population will go to the polls this year. Keen investors will keep a close watch on the politics for potential shifts in the wind.

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Prognosticating is generally a great way to make a fool of oneself. But two predictions can be made with near certainty for 2014: By November most Americans will be heartily sick of hearing about midterm elections that stand a slim chance of altering the frustrating deadlock in Washington. And most will pay scant attention to two dozen other elections that could actually bring in new leaders and governments across the developing world. Those who do spare some time for these faraway events may be able to make some money in the ever-volatile emerging markets, though.

Twenty-three nations encompassing 40% of the world's population will go to the polls this year, according to Todd Henry, an EM portfolio strategist at money management giant T. Rowe Price (NASDAQ:TROW). When you exclude China, which does not go to the polls ever, that means well over half of eligible human voters can cast ballots before 2014 is out.

The most closely watched races among investors are in India, the world's 10th largest economy, and Brazil, which is No. 6 and second in the developing world after China. Markets are so far bullish on Indian parliamentary elections that must be held by May, but less so about the Brazilian presidential contest slated for October.

The Indian stock market was a train wreck for most of last year as Morgan Stanley's (NYSE:MS) analysts, looking at the country's deflating growth outlook and ballooning current account deficit, included it in their Fragile Five list of EMs most likely to melt down. The iShares MSCI India ETF (BATS:INDA) lost 27% of its value from January to September. But the market has regained most of those losses with a 21% run-up over the past five months or so.

One big reason, Henry says, is investors' increasing confidence that the opposition Bharatiya Janata Party (BJP) can oust the Indian National Congress, which is viewed as exhausted and inept after 10 years in power. The BJP is more famous abroad, to the extent it is famous at all, for a muscular Hindu ideology that led it to support the destruction of a mosque in the 1990s and allegedly condone anti-Muslim pogroms in 2002. But its prime ministerial candidate Narendra Modi is something of a hero to businesspeople.

As chief minister of Gujarat state for the past 12 years, he has turned that region into India's flourishing engine room, responsible for one-quarter of the whole nation's exports. The state economy early tripled in size. Modi is the "the lord of men, a leader among leaders and a king among kings," recently enthused Anil Ambani, billionaire co-owner of the Reliance Group conglomerate. Money managers conclude that the prospect of his coming to power is at least worth a tactical overweight.

Brazil's market blues, by contrast, are deepened by the perception that there is no alternative to little-loved incumbent president Dilma Rousseff. The iShares MSCI Capped Brazil ETF (NYSEARCA:EWZ), is down 5% since Sept. 1, 2013 and 25% over the past 12 months.

Rousseff has annoyed investors with economic policies that seem at once counterproductive and erratic. She has clamped price controls on fuel and electricity to fight inflation, then backed away from them. She has leaned on banks to increase lending even as their loan books deteriorate, and opposes legislation that would increase central bank independence. Brazil's underinvested infrastructure has seen little if any improvement on her watch.

Yet generous social payments and the endorsement of her iconic predecessor, Luiz Inacio Lula da Silva, have kept Rousseff's approval ratings comfortably above 50%, and opposition candidates are less than captivating. The betting is she will cruise to another four-year term in October, and Brazilian equities will continue to slump accordingly.

Election results are far from a sure thing in either country, of course. The BJP might fall short of a majority in India and get mired in coalition talks with Congress that would depress markets anew. Rousseff could be badly embarrassed if things go awry when Brazil hosts the soccer World Cup this summer, and lose her grip on the electorate. Keen investors will keep a close watch on the politics for potential shifts in the wind.

But the most remarkable element of the 23 developing world elections this year is what will not happen: any root-and-branch diversion from the basic tenets of liberal market democracy. Incumbents and opposition will contend with spirit, but they are all in the same broad, ideological ballpark. This is a remarkable shift from a generation ago, when Marxists, militarists, monarchists, and dictatorial Juan Peron-style populists contended violently for power across much of the globe, egged on more often than not by the United States or Soviet Union. History may not have ended with the superpower confrontation, as Francis Fukuyama famously suggested. But it has in many ways improved, emerging markets slump or no.
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No positions in stocks mentioned.

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