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Emerging investment opportunities
With elections taking place across the globe this year, Jana Harvey, EM Debt Senior Portfolio Manager, looks at the outcomes in three key emerging economies, the potential impact on environmental policies, and what this could mean for investors.
It’s shaping up to be a big year for power transition across the world, as voters in over 60 countries choose their new leaders in elections. These include some of the largest GHG emitting nations globally, such as India, Indonesia and Mexico1.
All three elections are now behind us and despite some elements of surprise in all of these, incumbents have either retained a diminished power (India) or strengthened their current leading positions (Mexico). In the case of Indonesia, the current president’s chosen successor, who promised continuity of popular policies, won by a landslide.
As such, is it fair to assume there will be no change in these countries’ environmental agendas, or has the popular vote brought emerging markets (“EM”) closer to more ambitious environmental policies and the world closer to meeting the Paris Agreement target?
We believe the latter is a possibility, as we sense an increased urgency to deal with environmental risks across all three countries.
In our full piece, we discuss the following:
- India: the country remains predominantly dependent on fossil fuels due to the its fast growing energy demand, however the Indian People’s Party (BJP) compelled to work with local parties to secure a majority, a more decentralised governance increases the likelihood of more inclusive policies.
- Indonesia: despite a range of environmental achievements by the outgoing administration, Indonesia’s transition ambitions remain critically insufficient (as evaluated by CAT). We expect the next government to work to enhance its nationally determined contributions (NDC) and fast forward its net-zero target to 2050, a much-needed development to step up Indonesia’s transition ambition, which could lead to attractive investment opportunities.
- Mexico: newly elected president, Claudia Sheinbaum, former Mexico City mayor and a climate scientist by profession, is expected to elevate environmental policies within the government’s agenda, with Pemex playing a key role in Mexico’s energy transition.
What this means for investors
Whilst we are expecting broad policy continuity across all three major GHG producing economies, we believe that changes brought about by recent elections can progress environmental policies compared to previous administrations. This is in line with growing urgency around climate change. As exposure to, and management of, environmental risks is becoming increasingly reflected in market pricing, we believe markets would reward these efforts positively in the pricing of sovereign risk across all three countries.
Moreover, more ambitious national agendas are likely to unlock opportunities within the respective state-owned enterprises and corporate sectors, as players pivot towards national priorities.
As always, there are risks to this positive view. However, whilst we share market concerns around possible constitutional changes in Mexico and the possibility of less prudent fiscal management in Indonesia under new administrations, we continue to look through the near-term noise to identify attractive, transition-related investments across all three countries.
Download our full piece here
1 Our World in Data, as of 2022; annual GHG emissions tonnes of CO2 equivalents.
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