UBS Sees Mexico Market Risk From Lopez Obrador's Party, Not Him

(Bloomberg) -- Forget about dominant Mexican presidential candidate Andres Manuel Lopez Obrador. If you want to buy the post-election dip, watch for Congressional gains by his left-wing party, according to UBS Group AG.

While investors are prepared for victory by Lopez Obrador on July 1, a solid win by his Morena party in Congress -- even short of a majority -- would weaken opposition to his administration and spook markets, said Esteban Polidura, the Swiss bank’s chief investment officer for its Mexico unit. Yet assets will rebound from an initial selloff as Lopez Obrador proves to be less of a threat to the strength of Mexico’s economy, Polidura said.

"The market might have accounted already for a potential Lopez Obrador presidency," Polidura said in an interview. "But the market has not accounted yet for a potential Congress where Morena has material strength."

UBS Sees Mexico Market Risk From Lopez Obrador's Party, Not Him

Lopez Obrador holds a 43.7 percent lead among voters, according to Bloomberg’s poll tracker. His party holds 50 of 500 seats in the Lower House after picking up about 20 defectors during the past year.

There are signs the party will continue gaining ground. It leads polls in Mexico City -- traditionally a stronghold for Lopez Obrador’s previous party, PRD -- and Morena almost beat the ruling PRI party last year in the state of Mexico. Moreover, lawmakers may be tempted to switch party allegiance if Morena posts a big win, Polidura said.

"You could have an immediate market reaction based on sentiment and the perception of risk," Polidura says. "After some time, if nothing negative happens, you might have some money flowing back into Mexican assets."

The Mexican peso is the best performer among major currencies this year as investors bet Lopez Obrador will moderate some of the more left-leaning rhetoric that has defined his political career. Yet Morena’s growing strength means investors who expect Congress to block attempts by Lopez Obrador to roll back a 2014 energy sector opening and scrap construction of Mexico City’s planned airport might be in for a surprise.

"The market is comfortable with the idea that a PRI and PAN majority in Congress would function as a counterweight to any type of drastic measure he has in mind," Polidura said. "But what if it doesn’t?"

The peso rose 0.5 percent to 18.1380 per dollar at 12:22 p.m. in New York.

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