Don't Just Bet on AMLO Win in Mexico, Says UBS. Think Landslide

(Bloomberg) -- His poll lead is commanding, and it’s been around a while, so investors have been forced to come to terms with the likelihood that Andres Manuel Lopez Obrador will be Mexico’s next president -- however much they hate the idea.

What’s not priced into most calculations is that the leftist front-runner could also enjoy a congressional majority after the July 1 vote, making it easier for him to reset Mexican economic policy. That scenario looks increasingly likely, according to analysts from Eurasia Group and UBS AG.

If Mexico’s an emerging-market laggard this year, the politician known as AMLO is likely to blame. Pledges to boost social spending and review oil auctions to private and foreign companies have helped him to a 16-point lead over his nearest challenger, Ricardo Anaya, according to Bloomberg’s latest poll tracker.

Lopez Obrador’s Morena party is also polling strongly in congressional contests, and that -- coupled with the likelihood of lawmakers defecting to the winning side -- puts a working majority within reach.

Accounting for AMLO

“The market might have incorporated the possibility of an AMLO win,” UBS’s chief Mexico investment officer, Esteban Polidura, said last week. “But we believe it still needs to account for potential Morena dominance in several gubernatorial elections and in federal congress.”

Mexico’s peso, the best-performing currency in the world at one point earlier this year, has gone into reverse. It’s down more than 9 percent from its year-to-date high in April, with many analysts predicting further losses before the election. And while MSCI’s emerging-market stocks benchmark has edged higher this year, Mexico’s main index has fallen almost 7 percent. Both the currency and Mexican stocks extended their losses on Tuesday.

Morena scored 45 percent approval in one recent survey, matching Lopez Obrador’s presidential support in the Bloomberg tracker. A Monday poll from Mexican newspaper El Financiero put the party’s backing in congressional contests at 41 percent.

A majority would allow Lopez Obrador to get his budgets through the legislature without obstructions.

‘Main Concern’

Lopez Obrador and his pick for finance minister, Carlos Urzua, have pledged to reduce the fiscal deficit by eliminating corruption and graft. But the candidate is also calling for immediate tax cuts in border regions, and a shift in spending toward social programs. Some analysts say a working majority would allow him to approve the spending portion of the budget without negotiating with other parties.

That’s the “main concern” for Shamaila Khan, director of emerging-market debt at AllianceBernstein. “There are things that he can do with a majority that he obviously would not do if the congressional elections lead to a result that would keep a stricter check on him,” she said in an interview last week.

To achieve a majority, Lopez Obrador’s party may not even need to win most of the seats.

A Morena victory of any kind will likely trigger defections from the center-left PRD, a junior partner in Anaya’s electoral alliance, according to Daniel Kerner of Eurasia Group, a New York-based risk analyst. About a third of the lower-house candidates in Anaya’s three-party coalition are from the PRD. Kerner said that even some lawmakers from the governing PRI, running a distant third, may jump ship.

Likely to Narrow

To be sure, some analysts are skeptical that Lopez Obrador’s party will sweep to an across-the-board victory. Luis Carlos Ugalde, a former chief electoral regulator, said the polls will likely narrow before the election, leaving the Morena bloc as the largest in Congress -- but short of a majority.

It’s also highly improbable that Lopez Obrador will gain the two-thirds majority needed to reverse laws like the landmark energy opening of 2014, which brought foreign investment into the industry for the first time, according to AllianceBernstein’s Khan.

But even with a simple majority, “he can certainly have a weaker fiscal policy, he can certainly slow down energy reform,” said Khan -- who says she’s one of the few investors preparing for that outcome.

©2018 Bloomberg L.P.