Mexico's AMLO sets stocks up for tremendous rally
Another Am-low for Mexico
The next president of Mexico, Andrés Manuel López Obrador, doesn't take office until Saturday, but in a rather masterful fashion he has already set up stocks for a great rally during his tenure. Nothing is more important to stock market returns than the price at which you buy, and as my Bloomberg News colleague Andrew Cinko pointed out, that price has dipped recently in a way that breaks a trend that had stayed intact for virtually the entire term of the current president as measured in pesos.
Cinko suggests that Mexican stocks could already be “broken,” at least for anyone driven by technical analysis. The Wall Street Journal has published a drastically negative analysis saying that López Abrador, who is known as “AMLO,” is spooking foreign investors, while Citigroup is offering baskets of “Amlove” stocks just in case he turns out to be a responsible president (they include banks and some infrastructure groups), and a longer list of “Amscared” stocks that might survive even if he proves to be an interventionist, including some of Mexico's biggest names, such as Walmex, Cemex, Femsa and Carlos Slim's vehicle America Movil. The Amlove stocks did terribly on Monday, thanks largely to an 8.5 percent selloff in the already battered banking sector. Viewed in dollars, that has pushed Mexico's benchmark equity index to a nine-year low.
All of this has happened without even mentioning that Mexico's northern neighbor, still the most powerful country on the planet, saw fit to fire tear gas over the border at migrants seeking to enter the U.S. during the weekend.
Naturally, much depends on whether the new president turns out to be AM-lovable or AM-scary, but this tumble does have the look of catharsis or revulsion. Stocks are priced for the new president to be a despicable and irresponsible tyrant. Mexico's constitution and institutions may yet be proof against that, although if markets keep tanking the risk will increase that AMLO responds by uniting the people in a sense of grievance against international capital markets.
The first moderately bullish note I have seen on AMLO for a while appeared on Monday from Pacific Investment Management Co., or Pimco . I suggest taking a read. The main points are that AMLO inherits a strong fiscal position, and that he doesn't need to do much to demonstrate to investors that they have grown too cautious too quickly:
We suspect that the market's tendency to pigeonhole AMLO as a profligate leftist populist will offer interesting investment opportunities for a sovereign that remains on reasonably solid financial foundations.
The delivery of a coherent 2019 budget plan on December 15th, targeting a continued primary surplus, would validate our sense that the market has over-extrapolated the risks to Mexican creditworthiness stemming from AMLO's campaign pledges on social and infrastructure projects.
Valuations are now much more attractive for investors: Sovereign external credit is already priced for a two-notch credit rating downgrade to BBB-, the cusp of investment grade status. Domestic real one-year interest rates, at 4.8%, are at 13-year highs and are the second-highest among major emerging markets, based on our analysis. On a comparable basis, the Mexican peso is the cheapest asset of all, over two standard deviations below its long-term average, according to our estimates
John Authers is a senior editor for markets. Before Bloomberg, he spent 29 years with the Financial Times, where he was head of the Lex Column and chief markets commentator. He is the author of “The Fearful Rise of Markets” and other books. Petroleumworld does not necessarily share these views.
Editor's Note: This article was originally published by Bloomberg Nov. 26, 2018. All comments posted and published on Petroleumworld, do not reflect either for or against the opinion expressed in the comment as an endorsement of Petroleumworld.
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