(Corrects spelling of name in 7th paragraph to Jorge Mariscal,
not Jorge de Mariscal)
* Fragile Five elections pass off smoothly, reforms embraced
* Focus switches to elections in Ukraine, Egypt this weekend
* Coup in Thailand, security in Nigeria also worry investors
* New governments have to meet both market, voter
By Carolyn Cohn
LONDON, May 23 Elections from Jakarta to
Johannesburg have calmed investors' worst fears about political
risk in emerging markets this year, but voting in Cairo and Kiev
and instability in Thailand and elsewhere are creating new
Polls in the so-called Fragile Five economies - Brazil,
India, Indonesia, Turkey and South Africa - topped investors'
list of political worries for 2014.
As these countries were dubbed 'fragile' because of their
reliance on foreign investor flows to shore up government
balance sheets, elections were seen likely to lead to more
spending and more instability.
Presidential polls in Brazil and Turkey are still to come,
but parliamentary elections in India and South Africa and local
elections in Turkey have been greeted with enthusiasm by
In India, the result was a resounding victory for the
business-friendly opposition and in South Africa and Turkey
there were strong performances by the ruling parties, who have
already shown some willingness to tackle problems.
Uncertainty remains ahead of a presidential poll in
Indonesia, following parliamentary elections last month, but
markets there are also relatively unscathed.
"So far, elections have not delivered what was feared -
political uncertainty," said Jorge Mariscal, chief investment
officer for emerging markets at UBS Wealth Management.
"So far, elections have resulted in better outcomes for
The outcome for October elections in Brazil may be less
comfortable for investors as incumbent leftist President Dilma
Rousseff has been gaining in the polls.
However, in all of these markets, credit default swaps,
often used as a proxy for measuring political risk, have fallen
sharply. This also reflects a more positive view than six months
ago on the extent of monetary stimulus in developed markets,
which has kept U.S. yields relatively subdued and supported
Emerging market equities have risen 4 percent this
year, outperforming developed market peers, after falling 5
percent last year.
Brazil's five-year credit default swaps (CDS), used to
protect against default or restructuring of debt, have dropped
nearly 50 basis points this year, to 155 bps, according to data
That means it costs $155,000 a year for five years to insure
$10 million of Brazilian debt against default.
South Africa's CDS have fallen 30 bps this year to one-year
lows of 170 bps, while Turkish CDS have dropped by 50 bps, also
to 170 bps.
Instead, worries have switched to the outcome of elections
this weekend in Ukraine and Egypt, the security situation in
Nigeria and this week's coup in Thailand.
The flare-up between Ukraine and Russia, which led to the
annexation by Russia of Crimea following the ousting of
Ukraine's pro-Russian president Viktor Yanukovich, has made
investors wary about trading these countries' assets.
Ukrainian presidential elections are expected to result in
victory - possibly in Sunday's first round - for confectionery
magnate Petro Poroshenko, a former Yanukovich ally who later
joined the protests against him and supports Ukraine's tilt
towards the West.
But Ukrainian politicians are seen needing to tread a fine
line between friendship with Europe and with Russia, and that
makes investors nervous.
"It's not just about Ukraine per se, it's what the outcome
of the Ukraine elections implies for relations between G7 and
Russia," said Jonathan Wood, associate director at political
risk consultancy Control Risks.
Ukraine's CDS have fallen from their highs but still trade
not far below 1,000 bps, a level representing distressed debt.
In Egypt, former army chief Abdel Fattah al-Sisi looks set
to win the presidency in a May 26-27 vote.
But investors are doubtful he is willing to tackle thorny
problems such as reform of popular energy and other subsidies,
and say plans for increased taxation will hit consumption and
dent stock market performance.
Those risks are not priced into Egyptian assets, they add.
Aaron Grehan, emerging debt fund manager at Aviva Investors,
does not hold Egyptian debt.
"It's very hard to be positive on Egypt given current (debt)
spread levels and a lack of reward for the risks," he said.
Likewise in Thailand, the stock market has risen 7.5
percent this year as optimism returned to emerging markets after
a huge sell-off last year.
But the outlook looks very uncertain after the army seized
control of the government in a bloodless coup this week.
"I am worried about Thailand," said Marshall Stocker, global
equity fund manager at Eaton Vance.
"I do not see the Thai market as currently reflecting
fundamentals, foreigners are not buyers."
Nigeria, which faces presidential elections early next year,
has made headlines across the globe with the abduction of more
than 200 schoolgirls by Islamist group Boko Haram.
Investors have generally shrugged off attacks by Boko Haram
as they have taken place in the north of the country, while
foreign investment is focused on the oil-producing Niger Delta
in the south. But that could start to change.
"There is a latent concern that what we are seeing in the
north could reach further south, that is being expressed by many
of our clients," said Wood at Control Risks.
The high-yielding Nigerian naira currency, however,
is continuing to attract foreign investors so far.
In Nigeria and across emerging markets, the challenge for
post-election governments will be to carry out the reforms that
markets expect, while keeping often restless populations
"They have managed to win elections," said Wood. "But it
gets more and more difficult to fulfill promises and to tame the
social pressures that have bubbled up."
(Additional reporting by Sujata Rao; Editing by Susan Fenton)