Mexican election hits financial markets

by: , Portfolio Strategist, New York Life Investment Management

Andres Manuel Lopez Obrador (AMLO) swept the nation of Mexico in a landslide election win, with his Moreno party taking not only the Presidency but also both houses of Congress. Markets traded lower Monday morning, possibly on this news, with the Peso down -1.3% and equity markets in the US and Mexico marginally lower.

What happened

Leftist, populist, and nationalist, candidate AMLO beat out three rival candidates in a historic win with the highest levels of voter turnout observed in several election cycles. Additionally, more than 3,400 other seats were awarded over the weekend. The result is a clear majority of AMLO’s party in both houses of congress creating anxiety in financial markets, and a Mexico poised to undergo change.

Why does it matter

AMLO creates uncertainty in two ways: (1) His hard stance on President Trump and the United States. (2) His pursuit to eradicate poverty, crime, and corruption appears fiscally untenable.

  1. Admittedly, all four candidates spoke out against U.S. President Donald Trump during their campaigns. The candidates also asserted the importance of continued U.S. relations. However, AMLO is a strong nationalist, and his policies may make a NAFTA agreement less likely.
  2. AMLO derives his popularity from the people of Mexico, who are fed up with the status quo and dream of ‘real change’. He promises to ramp up social programs, run a clean administration, and eliminate corruption. A noble cause, but investors are concerned that he will cancel business contracts and rack up debt.

For Mexico

The demand for change may be well grounded: The country currently suffers from a wave of violent crime; the outgoing government was surrounded with scandal; and, outside of a few successful endeavors, economic progress has been slow and uneven. Today, almost half of the population is poor (by its own standard)1.  Reforms launched over the past six years have laid the foundation for higher prosperity and wellbeing, but more work is clearly needed to overcome the divergences in Mexico.

Bottom line

Mexicans have elected the first leftist government in decades. Massive changes are likely for Mexico. The financial markets are signaling that economic trouble may be in store for our southern neighbor and its relations with the U.S.

1. World Bank (2016). World Bank, Global Poverty Working Group. Data are compiled from official government sources or are computed by World Bank staff using national (i.e. country–specific) poverty lines. National poverty headcount ratio is the percentage of the population living below the national poverty lines. National estimates are based on population-weighted subgroup estimates from household surveys.

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Robert Serenbetz

Portfolio Strategist, New York Life Investment Management

Robert Serenbetz is the Portfolio Strategist with New York Life Investment Management’s Strategic Asset Allocation & Solutions (SAS) Group. He contributes to investment thought leadership and communication efforts across New York Life Investment Management

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