Morgan Stanley’s Chief Latin America Strategist explains the
importance of Mexico’s upcoming presidential election, laying out
the possible investment implications of potential policy reforms.
----- Transcript -----
Welcome to Thoughts on the Market. I’m Nik Lippman, Morgan
Stanley’s Chief Latin America Strategist. Along with my
colleagues bringing you a variety of perspectives, today I'll
talk about why Mexico’s upcoming election matters for
markets.
It's Friday, May 10, at 10am in Sao Paulo.
Voters in Mexico will choose a new president in less than a
month, on June 2. The two leading candidates – Claudia
Sheinbaum and Xóchitl Gálvez – have presented strong campaigns
amidst a tense political backdrop. And yet, asset prices have not
yet begun to react to potential election outcomes.
There’s significant policy differences between Sheinbaum and
Galvez – thus an important investment debate around each of them.
However, polls suggest a strong lead for Sheinbaum, who is the
candidate from the ruling party Morena. In fact, it seems that
the key debate that markets are focused on right now is not so
much who wins, but rather what type of president Sheinbaum would
be, if she does get elected.
If she does indeed win, the expectation is for policy continuity
post-election—particularly as it relates to Mexico’s nearshoring
– or moving industrial supply chains from Asia to North America.
This trend has been a major driver of the country’s economy and
major asset classes.
And so the market seems to be focusing squarely on policy
decisions that may be taken by the incoming administration.
Mexico is in a strong position to benefit from its relationship
with the United States and as well as the nearshoring
opportunities. We see a positive skew for both equities and
credit, and think the election can act as a catalyst for assets
that have traded cheaply.
Yet, significant reforms are necessary to take full advantage of
this setup. Indeed, we would argue that rapid and deep structural
reforms would be crucial, especially when it comes to fiscals and
the energy space. For example, we think there could be a need for
stronger partnership between the public and the private sector
and a rethink of parts of Mexico’s electricity model. If Mexico
solves its electricity supply-side challenges, it can build on
its favorable nearshoring position. But on the other hand,
there’s no industrial revolution without electricity.
However, the risk-reward for the Mexican peso is slightly
different. It has already benefited from the rise in foreign
investment - and the high interest rate differential between
Mexico and the United States.
With all that said, there are risks from the elections, too. If
any political party wins two-thirds majority, it opens the
possibility for changes to the constitution. And current
proposals by Mexico’s sitting president could open the door for
larger fiscal deficits; and potentially some more unorthodox
policies down the road. We will continue to keep you posted on
Mexico’s election outcomes.
Thank you for listening. If you enjoy Thoughts on the Market,
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