By Vivienne Taberer, Portfolio Manager
Vivienne Taberer, Portfolio Manager, Emerging Market Fixed Income, discusses the upcoming elections across Latin America, including the risks and opportunities they present for investors.
Latin America at a policy crossroads
The results of widespread elections across Latin American countries this year will drive policy into the next decade, with six presidential elections on a full calendar that also includes a referendum and several legislative elections. Understanding the political direction of travel, whether it be straight ahead, or veering to the left or right, is likely to give us a much clearer steer on the risks and investment opportunities in the region over the medium term.
Chile and Honduras held elections in 2017, with the legislative elections and the first round of the Costa Rican presidential election and Ecuadorian referendum kicking off the 2018 electoral calendar in February. Colombian and El Salvadorian legislative elections followed suit in March.
While Paraguay and Venezuela also both have elections scheduled for the first half of the year, the market will mainly focus on Brazil, Colombia and Mexico. If the final outcome of the Costa Rican election, relative to polling, is anything to go by, uncertainty is likely to remain high and markets skittish.
Corruption and insecurity exercising voters
Corruption and insecurity are some of the key issues consuming voters against a generally more favourable economic backdrop. This has led to a more anti-establishment focus than would otherwise have been the case, eroding the reliability of polls in predicting election outcomes. Costa Rica provides a cautionary example, witnessing wild swings in the polls and the huge percentage of undecided voters, as conservative values became a key election issue. All this before voters finally re-elected the ruling party candidate in defiance of the last polls which put him way behind.
Three presidential elections in 2018
Presidential elections are scheduled in three of the region’s largest markets, a confluence that only happens once in every 12 years: Colombia, Mexico and Brazil.
Colombia: market friendly candidate ahead for now
Colombia holds its first round on 27 May, followed by a run off on the 17 June if no candidate wins an absolute majority. Centre-right candidate, Ivan Duque, has surged ahead in the polls since the primaries. While it looks unlikely that he can win in the first round, we are encouraged by his current polling. At this stage it appears his main competition is likely to be Gustavo Petro, the left leaning ex-mayor of Bogota. Markets have rallied sharply since the primaries, confident that the market-friendly, centre-right candidate will prevail and the recent political direction will remain on course.
Risk and opportunity in Colombia
Despite the recent good performance in asset prices, Colombian markets still appear well placed to rise higher in the event of a Duque win in the run-off. The centre-right steer in the country seems to be solid and hence our base case is for a Duque win, even if Petro does better in the first round than we anticipate. Given our constructive view, we hold an overweight bias in the peso and the local currency bonds.
Mexico: potentially moving left
Market certainty is also growing in the expected outcome of the Mexican presidential election on 1 July. Though we expect only a modest impact on the investment landscape, the political direction of travel is expected to move to the left, with voter concern about corruption being a major determinant of the shift. Left-leading candidate Andrés Manuel López Obrador, usually referred to as ‘AMLO’, continues to poll very well, well ahead the Institutional Revolutionary Party (PRI) and National Action Party (PAN) candidates, Ricardo Anaya and Jose Antonio Meade. With no second round in Mexico, it appears to be AMLO’s race to lose, with Meade and Anaya within the margin of error and nothing to suggest a strong consolidation of a big anti-AMLO vote behind one of the two.
Risk and opportunity in Mexico
The market seems resigned to an almost certain AMLO win, so the key focus shifts to what impact this could actually have. So far, policy outlined by AMLO appears designed to ease investor concerns, with no radical economic policies referenced in political rallies. In addition, it is highly unlikely AMLO’s party, Morena, will get a majority in Parliament, so it will be difficult to make dramatic changes in any case. So while the direction of travel is not great under an AMLO Presidency and there are long-term risks, in the short time we expect relatively limited downside to the markets should the predicted move to the left prevail. Clearly, significant upside potential exists if either the PAN or the PRI candidate manages an upset. A significant number of voters remain undecided and the presidential debates could well be the key to determining if the political landscape will shift back to the right. Both Anaya and Meade are expected to debate well and AMLO will need to avoid his mistakes of the previous two elections where he veered too far left. We are neutrally positioned in the currency and have moved to longer dated maturities in the local bonds market. There will likely be investment opportunities as volatility increases nearer the election.
Brazil: wide open
In Brazil, the race remains wide open. While there is still the expectation that the centre-right will consolidate behind a single, electable candidate, uncertainty abounds. The first round is scheduled for 7 October, with a run-off on 28 October. Ex-president Luiz Inacio Lula da Silva (Lula) on the left remains ahead in the polls, despite his arrest and the extremely high likelihood he cannot run, while the populist Jair Bolsonaro also polls well, coming in second in voter intentions. With party registrations only just having closed, the number of candidates in the middle remain large and with very fragmented support. Alckmin, the Sao Paulo governor, is the market’s favourite among these candidates but is not polling well .Marina da Silva has improved her polling very recently and seems well placed to capitalise on Lula’s situation.
Risk and opportunity in Brazil
The situation in Brazil remains the most unclear, and this will likely continue until the centre-right consolidates behind one candidate. While there still seems to be a core belief from many market participants that such a candidate will emerge and win, there are too many risks to really back this as a base case for now. Asset prices are likely to continue to react to this uncertainty, especially given broad disaffection with the political establishment among the electorate. One thing is clear though, the pressure for reform will be high for any successful candidate. With most candidates highlighting the importance of social security reform in the new administration, the risk-reward pay-off has made us constructive on the long end of the curve. In terms of the currency, we think it currently doesn’t offer sufficient value and believe there’ll be better opportunities to add given the anticipated pick-up in volatility.
Despite anticipating some election-related noise and inevitable volatility across Latin American markets, it appears unlikely we’ll see a sustained deterioration in the overall political framework. Countries like Venezuela are proving the exception rather than the rule. Consequently we retain our constructive view on the region, particularly given the recent sustained strength in global economic growth. Markets will almost certainly offer interesting investment opportunities along the way, either by a market overreaction or more granular election outlooks.
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