The effect of elections in Mexico on the markets

Andrés Manuel López Obrador, the candidate with the best chance of winning the presidential election of Sunday at the Mexico. Bloomberg [19659005] Sunday's presidential and legislative elections in Mexico could have important implications for global equity and fixed income markets. The record of the turbulence in Mexico during the presidential transitions, as well as the position of the peso among the currencies of the most traded emerging markets, should serve as a warning to investors.

The announcement of Mexico in August 1982, a month later of the presidential election, which could not pay the debt to foreign commercial banks ushered in a debt crisis Latin American that lasted a decade. The flight of capital again gained strength during the presidential transition in the second half of 1994, which resulted in a huge devaluation of the peso in December of the same year. It was also a precursor to the 1997 Asian debt crisis and the devaluation of Russia and the debt default in 1998.

The risk of this year's elections is greater because of the probability that the populist candidate Andrés Manuel López Obrador – known as "AMLO" and who is far from the traditional political trend – becomes president and wins a majority in Congress.

During the presidential campaign, AMLO severely criticized a "rapacious minority" of executives in the sector. His opponents compared him to Venezuelan President Hugo Chavez and suggested that his government would ruin the Mexican economy. The risk for investors comes from the fact that AMLO does not really want to work with companies to stimulate private sector investment, which has helped local stocks and the peso to rise this month, or if it simply relaxed

Initial market reaction could be reflected in peso movements during the week after the elections.

Despite this month's gains, the currency weakened considerably during the week. last year despite the increase in the interest rate by the Bank of Mexico. The threats of US President Donald Trump to build a wall on the southern border of the country and uncertainty about the future of the North American Free Trade Agreement (NAFTA) have had an impact on the depreciation of the peso, while investors on a victory of AMLO also caused capital outflows.

There are three events that investors must observe to decide whether the next administration will be favorable to Mexico's financial markets.

First, if AMLO wins and it extends an olive branch to private industry groups, such as the Mexican Business Council, seeking its support to stimulate economic growth , we can expect the peso to appreciate and US stock holders breathe a sigh of relief. But if the victory encourages AMLO to suggest restrictions on private investment in the energy sector, a position it has adopted in the past, it should be considered a major negative factor.

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Secondly, a decision to reverse energy reforms would also be negative for foreign direct investment flows and to ensure the long-term stability of foreign exchange resources of the country. Mexico has benefited from considerable inflows of foreign direct investment during the current administration, with an estimated investment of US $ 29,700 million in 2017, an increase of 11% over 2016. A shift towards the negative side of this variable would eliminate significant support for investors to obtain attractive returns on their portfolio investments.

Third, although AMLO is supposed to be a tougher negotiator with Trump than the current Mexican government, investors will judge the new government. for his willingness to find a common ground with his northern neighbor. If Mexico simply decides to withdraw from the treaty, it would be negative for both Mexico and US actions