One quarter down: 2024's election marathon continues to set the global stage

In our previous post, we emphasized that 2024 stands out as a historic election year, with countries representing nearly half of the world’s population expected to participate in the polls. Some key votes are closely monitored due to their significance to markets, businesses, and policies, against the backdrop of the most fragmented geo-economic landscape in decades. With the first quarter of the year nearly concluded, several notable elections have already taken place. Notably, Taiwan and Indonesia held widely reported elections in January and February respectively.

Taiwan’s Political Landscape: DPP’s Victory and Economic Implications

In Taiwan, the Democratic Progressive Party (DPP), known for its more anti-China stance, retained the presidency but lost its majority in the legislature. Consequently, Taiwan’s newly elected leader, William Lai Ching-te, faces the challenge of governing with a hung parliament, which may complicate the passage of new laws. The DPP’s lack of a clear mandate in both the presidential and legislative elections has sparked increased discussion about persuading the Taiwanese people through non-violent means, while also preparing for the possibility of military intervention. Beijing’s response to the DPP’s election victory has been relatively subdued so far.

Since the beginning of 2024, the main stock market index in Taiwan (TAIEX) has risen by 11%. Shares in Taiwan rallied as investors adjusted their positions, feeling more confident with the political uncertainties removed following the presidential election. The Taiwan market plays a pivotal role in the global semiconductor and Artificial Intelligence (AI) manufacturing sectors, making it an attractive destination for investors seeking exposure to these industries. Industry giants such as Nvidia’s advanced chip supplier, Taiwan Semiconductor Manufacturing Company (TSMC), alongside Foxconn, the world’s largest iPhone manufacturer, and MediaTek, a leading mobile chipmaker known for its “edge AI” technology and partnership with Nvidia in smart vehicles, have seen their stocks rise on bullish forecasts for chip growth. According to Precedence Research, the global semiconductor industry was valued at US$544.78 billion in 2023 and is projected to reach around US$1,137.57 billion by 2033, with a compound annual growth rate of 7.6% during the forecast period from 2024 to 2033. The Asia Pacific region, which held a dominant market share of 52.8% in 2023, is expected to maintain its lead during the forecast period. The growing adoption of Internet of Things (IoT) devices, AI, and Virtual Reality (VR) technology are key factors driving market growth in the coming years.

Indonesia’s Presidential Election: Prabowo’s Triumph and Economic Outlook

In Indonesia, Defense Minister Prabowo Subianto – the preferred successor of President Joko Widodo – has claimed victory in the presidential election held on 14 February after unofficial ‘quick counts’ indicated that he secured close to 60% of the votes. His two opponents - Anies Baswedan and Ganjar Pranowo – managed to secure only 25% and 17% of the votes, respectively. If confirmed, this outcome would obviate the need for a runoff contest in June and alleviate near-term political uncertainty. This resounding victory indicates that Prabowo succeeded in overcoming several accusations regarding his suitability to serve as president, largely due to outgoing President Jokowi’s tacit endorsement of his candidacy and the selection of Jokowi’s son, Gibran Rakabuming Raka, as his running mate. These factors are widely believed to have swayed most voters in Prabowo’s favor. Prabowo’s election as Indonesia’s next president affirms Jokowi’s enduring popularity among ordinary Indonesians, following his decade-long focus on economic and infrastructure development. This should facilitate continuity in key government programs and policies, with effective execution being crucial to supporting sustained long-term growth and further market rerating. We anticipate Prabowo will maintain a focus on infrastructure development, including in the new capital city under construction, and sustain the current government’s efforts to support commodity downstreaming and expand battery and electric vehicle manufacturing.

Fitch Ratings expects Indonesia's monetary and fiscal policy settings to continue supporting macroeconomic stability, at least for the remainder of this year. Nonetheless, uncertainty surrounding medium-term fiscal policy has increased due to some of Prabowo’s campaign pledges, such as a free school lunch and milk program. Prabowo has stated that Indonesia could widen the fiscal gap to up to 2.8% of GDP from 1.7% in 2023 and still comply with the mandatory deficit cap of 3% of GDP. Speaking at an investment forum, Prabowo also expressed his belief that economic growth could reach 8% annually within the next four or five years. Despite the World Bank projecting Indonesia’s economic growth to average 4.9% over 2024-2026, it remains uncertain whether Prabowo will be able to continue his popular predecessor Jokowi’s legacy. While a Prabowo-Gibran victory is largely anticipated, the Indonesian stock market reacted positively to the single-round outcome, with the main stock market index in Indonesia (JCI) further increasing by 2.0% since the beginning of 2024.

 

Preparing for South Korea’s General Election: Economic Reforms and Market Strategies

Looking ahead to the second quarter, South Korea is preparing for its general election on April 10, 2024. The parliamentary elections in April will effectively serve as a referendum on the leadership of conservative President Yoon Suk Yeol, who has been contending with low approval ratings and a parliament dominated by the opposition. This dynamic has posed challenges to his policy agenda. Should President Yoon’s People Power Party fail to achieve a majority in the 300-seat National Assembly, it could render him relatively powerless for the remainder of his single-term presidency. Additionally, this outcome could undermine the conservative party's prospects in the 2027 presidential election.

President Yoon, known for his pro-business and pro-market reform stance, aims to rejuvenate the capital market in the lead-up to the general elections, targeting the nation’s 14 million retail investors to garner their support. Building on last year’s introduction of a temporary ban on short selling and reduced capital gains taxes for large shareholders, the government and the ruling party are committed to further measures to bolster and safeguard retail investors’ earnings. The Financial Services Commission (FSC) has introduced the Corporate Value-up Program, drawing inspiration from Japan’s playbook. This initiative aims to unlock the corporate value of around 525 companies or two-thirds of South Korean listed companies, trading at a price-to-book value ratio of less than 1. These companies’ market value is currently lower than the value of assets on the balance sheets. The program intends to enhance the stock price performance of these undervalued companies through improved profitability, capital management, and transparency.

The FSC’s voluntary program offers incentives such as tax benefits to companies that significantly enhance their shareholder returns and improve corporate governance. While the government has yet to announce substantial tax benefits, it plans to unveil details of the incentive in May, implementing it in the second half of the year. However, there are also penalties such as delisting for companies that fail to meet certain metrics.

In the coming months, discussions will focus not only on the specifics but also on prioritizing politically and economically significant issues, striking a balance between strengthening capital markets and addressing the concerns of the working-class population, who are set to vote in a few weeks. The two key aspects of the latest guideline are the “protection of minority shareholders” and “tax reform” to boost investments. The Ministry of Economy and Finance (MOEF) has indicated tax reform will be enacted before July 2024.

President Yoon and his administration mentioned changes to both inheritance tax and dividend income tax, which we viewed as the two most important taxes that need to be revised to lead corporates to change their behavior on governance and shareholder returns. The first crucial step is the implementation of regulations that protect minority shareholders. Subsequently, constructive taxation on dividends is essential as it serves as a vital mechanism for minority shareholders to benefit from companies’ income stream. Despite over 50% of KOSPI components being cash-rich, South Korean companies’ average dividend payout ratio remains relatively low at 31%, as reported by Morgan Stanley.

The prevalence of large family-controlled businesses, known as chaebols, present a significant impediment to boosting corporate valuations as they are frequently accused of deliberately undervaluing stocks to minimize inheritance taxes. Chaebols utilize complex intercorporate structures, where transactions among related parties often escape scrutiny in South Korea. In 2021, the founding dynasties of the 10 largest chaebols - including Samsung, Hyundai Motor, SK, LG, Lotte, GS, and Hanwha – owned an average of 0.8% of the shares in their groups, according to the Korea Fair Trade Commission. When including their relatives, this ownership increased to 2.4%. Despite this, these dynasties controlled an average of around 58% of their groups’ shares through various channels, including affiliates and non-profit organizations. The 10 largest chaebols represent two-thirds of the KOSPI 100 market capitalization, according to Societe Generale Cross Asset Research.

At the heart of South Korean companies’ subdued valuations is the high inheritance tax, which can reach up to 60%. This tax structure incentivizes behaviors that suppress stock prices. Achieving higher valuations will necessitate time and concerted effort, akin to the decade-long process Japan underwent to attain its current state. Nevertheless, the global investor community continues to express keen interest in South Korea’s future development. Japan’s similar program, which has experienced significant success over the past 12 months, serves as a notable example. The Tokyo Stock Exchange’s main index, the Nikkei 225, recently reached its highest level since the 1990s. The positive trajectory indicates ongoing progress in Korea’s Corporate Value-up program, which remains a prominent theme post-elections, and for this to lead to a rerating of the KOSPI from its 10-year average price-to-book of a below 1x closer to the emerging market average of above 1.5x.

 

General conclusion

As the first quarter of 2024 concludes in this landmark election year, we've observed that the anticipated political changes have not adversely affected stock market performances. The resilience of markets, despite the potential for political upheaval, provides a reassuring signal for investors monitoring the upcoming elections. However, it remains to be seen whether this stability will persist throughout the year's remaining electoral events, and this will be an important aspect to monitor as we progress further into 2024.