In December I wrote an article entitled How Mexico Elections Could Affect Portfolios. The general theme at that time was to maintain a very cautious approach to holding or buying Mexican assets due to the probability that a populist candidate with potentially unfriendly market policies would be elected president. That July 1 election date is fast approaching and an update is warranted.
There are three main candidates in the race; Jose Antonio Meade (PRI), Ricardo Anaya (PAN), and Andres Manuel Lopez Obrador (MORENA). Lopez Obrador, or AMLO as he is known, has narrowly lost the last two elections with cries of fraud causing violence and protest. As polls show currently, he is a strong favorite with polling numbers in the high 40s and a 20 point lead on Anaya. The most positive outcome, currently, is that somehow Meade or Anaya win. However, with the lead so large and using history as a guide, even that scenario seems likely to end up with negative outcomes due to the serious protests and disruptions that are likely to ensue.
The more probable scenario is that AMLO wins and the markets have to deal with the fallout. Of course, it is not known what that fallout would be precisely, but this candidate runs a highly populist campaign with a platform that could include renationalizing the energy sector, turning his back on NAFTA and other US-linked agreements, while pursuing fiscal and social policies that would definitely upset the business class and status quo. His proponents are trying to paint him in a more friendly light, but there is considerable doubt that he will be anything other than hostile towards business and markets. Where he fits relative to Chavez or the perception of Lula during his 2002 campaign is not yet known, but he is on the spectrum; so there is risk to financial markets.
Someone on the Accuvest team is in Mexico several times a month consulting and advising on the financial markets. Many of the political conversations we have include commentary that borders on hyperbolic. Often times that kind of embellishment makes us think that the risk is fully priced in to the market. However, there is still too much uncertainty about what kind of policy outcomes we might see. Also, unfortunately, it is a little difficult to see much upside in any kind of scenario; expectations of a bounce or reversal seem unrewarding.
The best long-term scenario is that someone other than AMLO wins the election. Many of our conversations with political strategists focus on the undecided voters, which still represent a fairly large number, so perhaps a legitimate win for Anaya is still possible. As we have heard many times, these voters and others who may have expressed an opinion in a poll, will all line up for whichever candidate is in 2nd place going into July 1; an ‘anyone buy AMLO’ voting bloc. Simplistic math can support that thesis, but it would take everything falling into place. And we are late in the campaign; debates have come and gone with no real changes in the polls. Gaffes that may have doomed AMLO in previous elections do not seem likely at this point. So, again, best case scenario – he somehow loses which would undoubtedly bring chaos.
Accuvest is in the portfolio management business, so having an implementable view on every market in the ACWI is required. Our far-from-rosy outlook needs a bottom line recommendation for this article be meaningful. As mentioned in December, we were not going to be long Mexican assets any time prior to the elections.
Accuvest Country Rankings – June 2018
Source: Accuvest Global Advisors
For a brief time the peso did strengthen to levels that seemed extreme and for certain portfolios we actually initiated a short position on the currency. The weakening of the peso in the past month has been fairly dramatic in time and magnitude. We are likely to cover half the position prior to the election as negative sentiment is certainly not a secret and is in the price that has rewarded us nicely. A lot of the NAFTA rhetoric has also been negative and is baked in to the current price.
Mexican Peso (Price of 1USD in MXN)
Another point made in the December piece was that in the past Mexico has had fairly significant declines in asset values in times of crisis. In all cases, those were buying opportunities. Our attitude is to assume that such a crisis could unfold after the elections; hopefully not, and maybe it’s a low probability. We will look to take advantage of this opportunity. If nothing so severe comes to pass, the opportunity cost is low given Mexico’s small weight in the ACWI. Accordingly, this is a time to be attentive and patient.