This week, the emerging market complex continued to take solace from the price action in core markets, with treasury yields dropping to February lows and the dollar remaining on the backfoot. As noted last week, relative serenity in our asset class is often punctuated by headlines on the ground. This week proved no exception, with elections in both Mexico and Peru the key focus. On the former, voters headed to the polls in Mexico’s mid-term elections, with 20,000 political positions across 32 states up for grabs. The key area of interest for market participants was the resulting composition of the 500 seat Lower House; would the President hold his supermajority and the platform to pursue his often-controversial policy agenda? In a shock result, the President’s supermajority evaporated; while the incumbent MORENA party is likely to have enough seats to approve new laws, which require a simple majority, the result dramatically reduces support for the President’s agenda and increases the probability of gridlock. The market reacted favourably to the election result, with the Mexican peso among the best performing EM currencies this week (+1.22%).
Elsewhere in LATAM, the Presidential run-off in Peru was one of the closest contests that this author has ever seen; while the final votes are still being tallied, hard-left candidate Pedro Castillo has declared victory with a majority of just 69k (99.8% of votes counted). While one could argue that both candidates are a bad option for Peru, domestic markets were spooked by the likelihood of a Castillo Presidency. Since the result, the President in waiting has rowed back on some of his racier campaign promises. Firstly, he has ruled out nationalisations and the expropriation of private savings. Likewise, trade and currency controls are now unlikely to be implemented. Finally, and most importantly, the President has promised to respect the independence of the central bank. While his comments have stemmed the bleed in Peruvian assets, uncertainty remains, with a legal challenge from his opponent highly likely. As such, the Peruvian sol closed the week as one of the worst performing emerging market currencies (-1.00%).
As noted last week, we remain cautious when it comes to emerging markets; ongoing US exceptionalism is highly likely to result in further market tests of the accommodative stance of the Federal Reserve, higher core market yields and episodic pressure on emerging markets. At the same time, we are cognisant of idiosyncratic risk in our asset class; the political headlines in both Mexico and Peru are a stark reminder of these challenges. That said, we still believe there is money to be made in our asset class on a selective basis; we favour the emerging markets which have robust structural underpinnings to withstand the volatile backdrop. As such, we continue to favour Mexican assets, both in terms of MBONOs and the Mexican peso. Conversely, we are increasingly bearish on Peruvian assets given the likelihood of a hard-left President; we maintain our bearish stance on both Soberanos and the Peruvian sol.
Sources
Data sourced from Eurizon SLJ Capital Ltd as at 11th June 2021. ESLJ-110621-I2
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