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After AMLO wins big in Mexico, investors wait for new president words with caution

Bloomberg

Markets watching next government signals on economic policy; AMLO makes investors nervous.-Play Video - Bloomberg's Eric Martin reports on Mexico's election of its first left-wing president in decades.

By Aline Oyamada and Justin Villamil

MEXICO CITY
Petroleumworld 07 03 2018

Mexico investors used to watching asset prices swing on the words of Andres Manuel Lopez Obrador are in for five more months of much the same.

The nation's unusually long period between elections and the transition of power mean traders will be obsessing about the next president's often contradictory speeches, without the ability to see what actual policies he pursues until his Dec. 1 inauguration.

That dynamic will add to volatility in Mexican markets -- which posted moderate declines after Lopez Obrador won a decisive victory Sunday that will also bring many of his allies to Congress. Investors need to understand if the leftist firebrand will proceed with the market- unfriendly measures featured in his campaign -- like halting a $13 billion airport project and pursuing aggressive social spending -- or if he will pursue a more balanced approach. The latter would provide relief for Mexican assets that sold off in recent months

“The bias will be for the peso to move back toward 21 per dollar,” said Alvise Marino, a strategist at Credit Suisse in New York, adding that his forecast assumes the global backdrop will remain unsupportive for emerging markets. He says the market response will be “less comfortable” if his Morena party and its allies win a majority in the congress.

Lopez Obrador's coalition looks poised to control both houses of Congress, according to one projection . With half the votes counted, he's on track to win more than three-fifths of seats in the lower house and 70 of 128 in the Senate, though final tallies in some of those races could still be days away.

Investors in Mexico should remain wary, as risks abound, Esteban Polidura, a multi-asset strategist at UBS AG, wrote in a note.

“Our medium-term outlook remains cautious,” Polidura said. “Most of AMLO's potential cabinet members have limited public sector experience and might have a longer-than-usual learning curve that could weigh on economic growth.”

For now, traders see either a strong selloff or quick rebound as unlikely. Stocks stumbled in the second quarter and the peso dropped as polls showed Lopez Obrador was bound for victory, so his election has already been priced in. While optimists have suggested that the next president's actual policymaking won't be as radical as his speeches, in which he often rails against the abuses of capitalism, it's all conjecture until he actually takes office.

The main areas of concern are Lopez Obrador's pledges to boost social spending, whether he will seek to foster foreign investment in the energy industry and his stance toward trade with the U.S. Some investors fear that energy privatization will be rolled back and spending to help the poor will push the country into debt.

Mexican assets fell Monday as emerging markets slid. The peso extended its decline to 20.0305 as of 11:31 a.m. in Singapore on Tuesday.

"During the transition period, financial markets might become unusually volatile and skittish," Jaime Reusche, an analyst at Moody's Investors Service wrote in a note. A key risk is the chance that "uncertainty surrounding the incoming administration's economic policy agenda will undermine business sentiment, hurting investment and growth prospects."

In a victory speech following the vote, the 64-year-old struck a unifying tone while saying his government will give preference to the poor. Carlos Urzua, who was picked for finance minister, said the new administration will be fiscally responsible and will respect the autonomy of the central bank and allow the peso to trade freely.

“The early indications from AMLO are fairly encouraging,” London-based Capital Economics economist Edward Glossop wrote in a report. “Beyond the very near term, though, it's worth cautioning that we still have little clarity on AMLO's economic policies."

Mohamed A. El-Erian, the chief economic adviser at Allianz SE, wrote in a column that investors were right to respond relatively calmly -- but they shouldn't become complacent.

Mexican assets “will remain sensitive to uncertainties about its trading relations with the U.S., to the receding of global liquidity, and to the limited effectiveness of multilateral institutions in influencing economic policy,” El-Erian wrote.

For some, the relief of having the election completed and a calm market reaction are enough to create a buying opportunity. Bulltick is recommending investors go long on the peso at 20 per dollar.

Others are in wait-and-see mode.

“AMLO has had statements that run the gamut from pragmatic to incendiary, so it will be interesting to see which facet of his personality prevails when in power,” said Dirk Schnitker, the head of Latin American equity sales at Auerbach Grayson.

— With assistance by Ben Bartenstein, Michelle Davis, and Lilian Karunungan

________________________

Twitter: @petroleumworld1

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Story by Aline Oyamada and Justin Villamil from Bloomberg.


bloomberg.com 07 02 2018

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