Over the past days, investors were primarily focusing their attention on the NAFTA negotiations and their potential implications on Mexico. In all fairness, despite this might be another an important preposition to take into account, the upcoming elections in July might be of a further concern.
In my view, Mexican assets will be more sensitive to the upcoming elections, because the differing electoral promises being put forward by the presidential candidates will have meaningful implications on the peso and financials asset classes. According to the latest polls, we will be seeing a tight race between candidates.
The hard-left Morena presidential candidate, Andres Manual Lopez Obrador, is pushing for victory through a draconian platform with analysts seeing this as the same style being adopted by Venezuela’s Maduro. On the contrary, Jose Antonio Meade is running on eradicating corruption, strengthening the institutions and continuing the fiscal and monetary policies, which were important for economic growth.
From an economic perspective, when analysing the main elements of Morena, it comes to no surprise that this would be the worst outcome. The desire of Obrador is to reverse energy, labour, fiscal and educational reforms, in addition of cancelling the construction of the New Mexico city airport, implement higher taxes and establish socialism in the nation. Clearly promises that will negatively affect economic growth.
Conversely, those being proposed by Meade are more economic friendly measures, which will continue to help and sustain economic growth. Undoubtedly, the latter would be the best scenario.
Recent polls published by Consulta Mitofsky, a leading poll reference company, show that Obrador is leading by 23 percent amongst the voter’s preference by candidate, whilst Meade is at around 19.4 percent. To the surprise of many, this is the first time in 13 years that Obrador has a real possibility of winning.
Credit implications
The implications for the bond market will clearly differ in line with who will be elected as the next president. In my view, given that Obrador continues to lead the polls and in the event that he goes on to claim victory, the negative implications will go beyond election date. A victory by the said candidate will trigger capital flight, which will cause a depreciation in the Mexican peso, lower investment and a negative business environment in the country is sure to ensue.
Thus, in this regard, prominent Mexican credit names such as Pemex, the Mexican state-owned Petroleum Company, which will be affected by the possible reverse of energy reforms, will feel the pressure, in addition to telecommunication names such as Axtel, which might be faced with harsher rules, and regulations.
On the contrary, the pro-economic growth electoral promises being put forward by Meade are more credit positive. In a scenario whereby polls start favoring Meade, we should see improving sentiment across the board which will ultimately be reflected in credit names.
I am aware that local investors over the years were exposed to the attractive returns being offered by Mexican bonds. These proved to be a good venue for abnormal returns when compared to European peers. In this regard, keeping an eye on election polls is imperative. However, this is the beauty of the emerging market world, as more assessment is needed. If done well, investors will continue to generate those abnormal returns, which such regions have been offering over the past years.
Disclaimer:
This article was issued by Jordan Portelli, investment manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.