Election season sets Brazil and Mexico on edge

Election season sets Brazil and Mexico on edge

Latin America’s crowded 2018 electoral calendar features presidential races in six countries, the end of Raúl Castro’s term in Cuba and a smattering of legislative elections. Money managers are paying particular attention to the contests in Brazil and Mexico, which together account for more than half of Latin America’s population. These two elections only coincide once every 12 years.

For Schroders portfolio manager Pablo Riveroll and Gregorio Velasco of Chile’s Bci Asset Management, one country, in particular, is setting off alarms bells. ‘[Mexico] is the one that worries me the most,’ Velasco said. ‘It’s a country where the economic situation isn’t bad, but it’s not clear that it’s improving, unlike the rest of the countries in the region.’

Viva la revolución?

Leftist candidate Andrés Manuel López Obrador has run for the Mexican presidency twice before, but this time he has changed his tone. He is now reaching out to businesses and the private sector by calling for more moderate policies, said Riveroll, head of Latin American equities at Schroders.

‘The moderation in his speech and in his campaign makes the likelihood of him winning higher and the likelihood that he will turn out to be very bad and very left-wing lower,’ he added.

However, for Riveroll, the problem is that this is all hypothetical. It is not clear how López Obrador would steer Mexico’s sputtering economy, with growth rates hitting a near four-year low in the third quarter of 2017, or how he would renegotiate the North American Free Trade Agreement (Nafta) if the current government fails to reach a deal with the US and Canada before the election in July.

As such, Riveroll is pegging his concern about the Mexican election at 6.5 on a scale of one to 10.

‘I think that the current government has a very strong team in the economy minister, the finance minister and the foreign affairs minister to sit down and negotiate Nafta,’ he said.

The new government, he added, would need to appoint equally competent people to avoid disaster.

Meanwhile, Velasco, Bci’s head of institutional fixed income funds, said that any buying opportunity from a López Obrador victory would be short-lived. He ranked his concern about Mexico’s election at 7.5 out of 10. 

Reform on the agenda

While Brazil also faces a high-stakes election in October, the fact that its economy is recovering after two difficult years of recession ‘changes everything,’ Velasco said. ‘We don’t know the reach, but what we see is that the rebound of the economic cycle is becoming [stronger]. That portends growth in the country as well as growth in internal demand, which is positive for several sectors of the economy,’ he said, giving the Brazilian election a fear factor of five out of 10.

Two strong contenders have emerged: Former president Luiz Inácio Lula da Silva, who has appealed bribery charges linked to the Operation Car Wash scandal, and Jair Bolsonaro, a right-wing politician and former military officer who has styled himself as the ‘Donald Trump of Brazil.’

Bolsonaro has gained favor by billing himself as anti-establishment, as Brazilians are rebuffing the current president, Michel Temer, in response to the corruption allegations that have engulfed his presidency.

Lula is leading the polls, but he might not be able to run after Brazilian courts upheld his corruption conviction in late January.

The ruling slashed Lula’s chance being on the ballot from about 50% to 10-15%, Velasco said. ‘We were worried about Lula because he belongs to a political party that’s more left-leaning politically and
economically, and therefore is perceived as less market friendly,’ said Velasco, who lowered his fear factor from three to five following the decision.

Riveroll also lowered his concern level, from 3.5 to three, saying that Lula would not be as bad as the market fears but a centrist candidate would be better. He stressed the importance of the election because of the need to reduce Brazil’s fiscal deficit.

Temer has been attempting to curb that burden with pension reforms, but as of late January, these have failed to pass Congress.

‘The most important thing that we’ll follow in terms of policy will be fiscal discipline and approving the pension reform that would put a cap on fiscal expenditures,’ Riveroll said. ‘So any candidate who generally supports that initiative should be seen positively by the market, and anyone who doesn’t support that would be a worry for
the market.’

This article was originally published on the February 2018 edition of the Citywire Americas magazine. To subscribe and receive the magazine click here.

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