Brazil to the far-right, Mexico to the left. At first glance, this is the most evident political shift Latin America’s largest economies opted for in 2018 when they elected, respectively, Jair Bolsonaro and Andrés Manuel López Obrador. The political rupture also brings a new economic dawn for both countries and naturally, financial markets have reacted to it. While the new administrations in each country have only just begun, moves in asset pricing suggest a shift in how investors perceive each country — with gleaming perspectives for Brazil and gloomy ones for Mexico.
“Regarding Brazil, there is hope about what needs to be done, while in Mexico there is fear about what can be done,” says Luciano Sobral, an economist at Santander Brasil. His assessment is backed by a survey carried out by the bank during a conference with senior management of 129 companies and more than 300 institutional investors earlier this month.
When asked which market they expected to be the best-performing in the region this year, 68 percent of respondents picked Brazil, up from 22 percent in 2018. Meanwhile, only 5 percent chose Mexico. According to Mr. Sobral, this shows the high expectations regarding Brazil’s business-friendly reform agenda — and the concerns about the contentious approach the Mexican president has shown towards financial markets so far.
Mr. Bolsonaro was sworn in Brasília in January 2019 to serve a four-year term and Mr. López Obrador, also known as AMLO, took office in Mexico City just a month prior and is set to stay in power until 2024. Since June, when politics became an increasingly important driver for the markets in both countries, Brazil’s benchmark stock exchange index has gained 23.7 percent. Meanwhile, Mexico’s S&P BMV/IPC index lost 3.2 percent as of January 28.
The turning point in both cases is directly related to the new heads of state.
How markets reacted to Bolsonaro and AMLO
In Brazil, markets soared in the first week of October, when polls gave Mr. Bolsonaro a clear lead in the electoral race. Later that month, the stock exchange in Mexico plunged after AMLO announced he would suspend the construction of an airport near Mexico City.
The USD 13 billion project had already been partially built and the president’s decision—after a referendum in which only 1 percent of the electorate turned out—sent shockwaves through the political and financial worlds. The concerns are that the new president may be willing to scrap contracts and take a populist stance, backed by questionable referendums, to rule as he wishes.
AMLO has been labeled “the most powerful Mexican president in decades” by The Economist. The broad majority his party coalition has in Congress boosts the chances of implementing policies and market fears alike.
His political strength is among the main risks listed by Nomura Securities when assessing the economic outlook for Mexico in 2019. “Risks associated with market and business-unfriendly proposals by AMLO ’s Morena party in Congress are likely to cause much policy and political uncertainty and represent another source of volatility,” reads the report by João Pedro Ribeiro, the institution’s Latin American strategist.
With a similar view, the credit agency Fitch revised its outlook for Mexico’s sovereign rating from stable to negative, right after the construction of the airport was halted.
Contrasting starting points
Despite the market’s suspicions, AMLO is in a much more...
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