Upcoming Elections in Emerging Markets May Be Crucial for Investors

Governments in developing markets can have a huge influence on investor confidence.
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While Americans are hitting the malls or the computer to find

Pokemon

cards,

PalmPilots

and plaid shirts for loved ones for the holidays, much of the rest of the world is heading to the voting booth, or preparing to.

The policies, style and tone of governments in emerging markets often affect investor confidence to a degree not seen in industrialized nations. Thus, the upcoming spate of elections in developing and emerging markets around the world has the potential to influence global investment opportunities in the year to come. Something to think about, especially since numerous emerging-country stock markets have vastly outperformed the U.S. market in 1999, a result of the recovery from the global financial crisis of 1997 to 1999.

Here's the rundown:

Mexico

. The holiday electoral season started here last month with the nation's first-ever open presidential primary by the ruling

Institutional Revolutionary Party

. However, if the vote was historic, the outcome wasn't;

Francisco Labastida

, the establishment favorite, won. In the general election next July, his main opponent will be

Vicente Fox

from the conservative

National Action Party

. Despite a relatively strong stock-market performance -- the benchmark

Bolsa

is up 61.7% this year -- anxiety about the economy is widespread and any turmoil could rock investor confidence. However, the opposition is divided, and recently, the PRI candidate who lost the November primary in a bitter vote patched things up with Labastida, quelling any speculation that he might endorse Fox.

Likely outcome

: Labastida wins and PRI continues its 70-year rule. Generally pro-market economic policies continue, but watch out if consumer confidence continues to drop, as this could become a self-fulfilling prophecy leading to economic slowdown.

Chile

. Last Sunday, Chile held its third democratic election since former dictator

Augusto Pinochet

stepped down in 1990.

Ricardo Lagos

, the candidate of the ruling center-left party, and conservative candidate

Joaquin Lavin

were virtually tied, but neither candidate received a majority, so a runoff will occur in mid-January. Such a strong showing by a conservative candidate who once was a supporter of Pinochet surprised many commentators, since Pinochet is still a loathed figure by most Chileans. However, Lavin was aided by discontent over the poor economic performance this year, and, ironically, Pinochet's battle to prevent extradition to Spain from the U.K. Neither candidate supported the extradition and Pinochet's absence from Chile meant the absence of Pinochet as a campaign issue.

Likely outcome

: As they say in politics and sports, Lavin has "the big mo," but I think Lagos will pull it out. Most of the votes not cast for Lavin or Lagos went to the

Communist Party

, more likely to side with Lagos in the runoff. Both candidates support continuing the free-market policies, which have contributed to Chile's strong economic performance through the '90s. With an expected growth rate next year of 5%, Chile looks good for investors.

Venezuela

. This week, Venezuelans overwhelmingly supported in a referendum a new constitution, approval of which was a high priority for President

Hugo Chavez

. Suffice to say,

Hamilton

and

Madison

need not fear their reputations as the world's greatest constitutional drafters. The new constitution which, among other measures, changes the name of the country to "the Bolivarian Republic of Venezuela," was hastily written over a period of just 100 days. The constitution would strengthen the power of the central government and the president, eliminate the Senate, mandate the continued nationalization of the oil industry and place limits on press freedom. Not the makings of a conventional market economy.

Likely outcome

: This won't reverse the flow of investors who are already fleeing Venezuela. Interested in investing in Latin America? Look to Chile or Mexico, or even Brazil.

Taiwan

. The race for Taiwan's new president is tightening as the March election approaches. The frontrunner,

James Soong

, an independent who defected from the ruling

Kuomintang Party

, has recently dropped in the polls following reports of alleged tax evasion. Soong is now running neck and neck with

Chen Shui-ban

of the opposition

Democratic Progressive Party

. The KMT's candidate, current Vice President

Lien Chan

, is now in third place. The conventional wisdom had been that the KMT would somehow bring Soong back into the party. That seems very unlikely to happen.

Likely outcome

: This one is wide open. If Soong can successfully address the tax-evasion charges, he'll probably pull it out; otherwise, I'd place my bet on Chen. Interestingly, all three candidates basically hold the same position with respect to China -- continued Taiwanese sovereignty leading to independence. That issue will only heat up over the next couple of years. In the meantime, Taiwan will continue to be one of Asia's most solid economic performers.

Russia

. The communist party leads the polls heading into parliamentary elections next week. However, the

Unity Party

is aligned with Prime Minister

Vladimir Putin

, who has gained popularity from his handling of the Chechnya crisis, and has risen in the polls. Already, Putin is emerging as a strong candidate to replace President

Boris Yeltsin

when his term ends next year. Surprisingly, all of the parties favor generally free-market policies with little state intervention.

Likely outcome

: No surprise here. Communists win. The stock market, already up around 200% this year, will go higher. Go figure.

For political junkies, this round of elections is entertaining to follow. For investors, they could be critical.

David Kurapka wrote speeches for Treasury Secretary Robert Rubin from 1996 until 1999. Before that, he was U.S. Trade Representative Mickey Kantor's speechwriter from 1993 to 1996. Kurapka writes from Oakland, Calif.