A populist, left-leaning candidate wins a Latin American presidential election by a landslide, and the stock markets cheer? That’s the unusual backdrop in place for Mexican equities.
Although Andres Manuel Lopez Obrador (often referred to by his initials AMLO) didn’t win the election until July 2, equity markets appeared to grow more comfortable with his potential victory several weeks in advance.
Since bottoming on June 5, the iShares MSCI Mexico ETF (EWW), for example, has rebounded nearly 20 percent. (The ETF remains around eight percent lower than where it stood a year ago).
One reason for market optimism: the president-elect appears more focused on fighting corruption and taming rampant crime. His economic policies, while aimed at boosting incomes of the nation’s poor, are not radical prescriptions like you’ll find in places such as Venezuela. “We are really not leftist, we are center-left,” incoming finance minister Carlos Urzua told Reuters.
Urzua has been making the rounds with dozens of leading American fund management firms, noting that AMLO supports restrained government spending, an independent central bank and free trade. That may explain why Mexican equities have received $89 million inflows since the election, according to Chris Dhanraj, the U.S. iShares head of investment strategy.
There had been rising concerns that Mexico’s trade flows would be greatly disrupted by the termination of the current North American Free Trade Agreement. Those concerns are now diminishing.
“In recent days, Mexican government ministers have been expressing confidence that the current NAFTA talks will have constructive outcomes,” says Dhanraj. Assuming the North American free trade framework holds together, AMLO stands to benefit from an economy on the mend. The Mexican economy grew just two percent last year, the slowest rate in four years. But current economic trends suggest the economy may grow closer to three percent this year, according to the Bank of Mexico.
Much of that growth will be fueled by rising domestic consumption as labor markets tighten and wages rise. The Mexican unemployment rate has slid from 5.5 percent in the spring of 2014 to a recent 3.2 percent.
A Question Of Balance
Mexico’s economy is structured very differently than other major Latin American economies. Whereas nations like Chile and Peru are highly dependent on industrial metals exports, and Brazil and Colombia are major oil exporters, “Mexico’s economy is much more balanced,” says Dhanraj. He notes that the telecom, retail, banking and beverages sectors are run by thriving conglomerates.