Investors are running away from Mexican stocks as leftist pulls ahead in the polls

Alan Ortega | Reuters
Leftist front-runner Andres Manuel Lopez Obrador of the National Regeneration Movement (MORENA) is greeted by supporters while arriving to a campaign rally in Zitacuaro, Mexico May 28, 2018.

The chances of a landslide victory for Mexico's far-left presidential candidate, Andres Manuel Lopez Obrador, are growing and that is scaring investors.

Mexico's benchmark stock index, the S&P/BMV IPC, plummeted 7.6 percent in May, marking its biggest one-month decline since February 2009. The iShares MSCI Mexico exchange-traded fund (EWW) — which tracks Mexican stocks — plunged 13.4 percent last month, its largest monthly loss since September 2011.

The move lower in Mexican stocks comes as Lopez Obrador, better known as AMLO, extended his lead over his opponents last month.

A poll conducted by Mexican daily Reforma between May 24 and May 27 showed 52 percent of voters would choose AMLO to become the country's next president, up from 48 percent in late April. Parametria, a polling agency based in Mexico City, found AMLO's preference among voters grew to 45 percent in late May from 38 percent earlier in the month.

People are realizing that AMLO might not just win the July 1 contest, but win by a landslide, said Jorge Mariscal, emerging markets chief investment officer at UBS Wealth Management. "There was an expectation that he would win, but that he would have a check from other parties in congress."

"If he wins by a landslide, it is a given that his party, Morena, will get significant participation in congress. It's not clear that they will get the 51 percent majority, but it's certainly possible," Mariscal said. He added that a congressional majority for AMLO's Morena party would allow him to change the constitution.

Some of AMLO's proposals include giving free access to telecommunication services like the internet and doubling the pension for the elderly. He also said in his platform that salaries "will rise as a principle of justice and to promote domestic consumption and markets."

AMLO's rise to the top of the polls and the fall in Mexican equities come as Mexico continues negotiations with Canada and the United States on a new trade deal. President Donald Trump has railed against the current deal, NAFTA, calling it the worst ever.

Trade tensions between the three countries rose this week after the Trump administration said it would implement tariffs on steel and aluminum imports from Canada and Mexico. Both Canada and Mexico said they would retaliate against the tariffs, stoking more fears of a potential trade war between the U.S. and key partners.

Larry McDonald, head of U.S. macro strategies at ACG Analytics and editor of The Bear Traps Report, said he thinks the sell-off in Mexican stocks has been overdone, noting that a lot of the risks for those assets — including NAFTA and the election — are already known. "We could bounce 10 percent from here, but whether they can hold those gains will depend on AMLO. He has to move closer to the center."

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