Mexico has got a new president – what are the big risks for investors?

Andres Manuel Lopez Obrador, or commonly known as Almo, won the Mexican election in a landslide victory last week – and the market has been rallying ever since.

While the incumbent party, the PRI, received just 16 per cent of the vote, Amlo secured an impressive 53 per cent – a sign of the Mexican people pushing for real change.

According to Transparency International, Mexico is ranked highly as one of the most corrupt countries in the world, and with the PRI embroiled in its own corruption scandals, the disillusioned Mexican population has been crying out for a party to steer them in a different direction.

Amlo has made some superhero-like promises – pledging to fight crime, cut poverty, and improve national security. And the Mexican equity market – the S&P/BMV IPC – seems to have confidence in him, rebounding almost three per cent since the election on 1 July.

Interestingly, the election has sent the peso south; it now sits below $19, from $20 the day before the election. But Philippe Waechter from Ostrum Asset Management reckons the peso’s fall is temporary, given the positive changes that will come in Mexico.

“In his first television speech, Lopez Obrador said that he wanted to respect Mexican institutions notably the central bank independence and the oil deals that were approved under the outgoing president. In other words, he doesn’t want to spontaneously make a revolution in the Mexican institutions.”

Most notably, the incoming president says he won’t nationalise companies, and – given that it’s in Mexico’s interest to maintain its strong links with the US and the Canada – he doesn’t want to give up on NAFTA either, providing a degree of certainty which has helped push markets upwards.

Amlo’s approach is market-friendly, and doesn’t look like it will throw too many curveballs that could rattle the economy.

But bear in mind that there is a six-month window before the new president comes into power, meaning the current government will probably sit on its hands during that period, creating a period of prolonged uncertainty – which is the immediate risk at this point in time.

Paul Greer, portfolio manager at Fidelity International, thinks Amlo’s pro-growth agenda will ultimately be benign. “With most of the political uncertainty now removed, and the result largely as anticipated, we expect some short-term relief in Mexican markets as pre-election hedges get unwound, ex-ante volatility drops, and the market focuses on the path towards Amlo’s inauguration on 1 December.”

But while the shifts that are set to happen in Mexico largely look positive, the wider emerging markets are set to undergo a tough time against a strengthening US dollar, trade protectionism, and growing inflationary pressures. Mexico’s northern neighbour might be bigger danger over the next six months.

Given that many major countries are pointing towards greater populism and shifting their politics to the right, it’s interesting that Mexico is going in the opposite direction. And Almo’s win will drastically change a political ideology that has been deep-rooted in the country for decades.

While some are concerned that his leftist policies could hinder the economy, there seems to be a general sense of optimism. Indeed, Morgan Stanley is taking a more positive view, with its analysts pointing to a strong outlook in corporate earnings growth.

Only time will tell whether Amlo can lever Mexico out of its hole, and set the country on the right track to really change for the better.

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