Mexico election update

Assessment of election results

On June 2, Mexican citizens made history and elected Claudia Sheinbaum as their first female president. Vote tallies surpassed even those of AMLO’s 2018 election victory and will give the Morena party functional super-majorities in both houses of Congress. This leaves the door wide open to potential modifications of the country’s constitution. The results are truly a landslide on multiple levels.

Although Sheinbaum’s victory was fully expected by Mexico-watchers, the scale of the victory was not. Polling data and the narrative put forward by political experts suggested a Morena victory, but one that would fall short of super-majorities. How should we interpret these results? In our view, the Mexican population has not necessarily shifted to the “left,” as the Morena party includes a variety of factions and viewpoints. Rather, it appears the opposition failed miserably to motivate voters to the polls, handing Morena super-majorities on the back of a weaker-than-expected turnout.

This leaves Mexico at a key inflection point in history. Sheinbaum will assume the presidency with a uniquely concentrated grip on power, just as the country stands to be a major beneficiary of trade frictions between the US and China. She will need to skillfully navigate Mexico’s relationship with the next US administration (whether Trump or Biden), while at the same time improving security and infrastructure conditions at home—both of which represent key bottlenecks that limit Mexico from taking full advantage of nearshoring trends. To capitalize on the economic opportunity presented by the current geopolitical moment, Sheinbaum will need buy-in from both investors and the private sector, which likely has colored some of her rapprochement with markets in the immediate aftermath of the election. Moving forward, she must clearly define objectives and costs to maintain investor goodwill.

Early challenge to Sheinbaum: Balancing investors and her base

While the new president will not take office until October 1, she already faces an initial hurdle that will likely inform investors how she is able to balance investor concerns with policy choice preferences of her base. In the immediate aftermath of the elections, Sheinbaum clearly recognized investor and private-sector unease with her sweeping victory, particularly the super-majorities in Congress. In response, Sheinbaum showed a degree of pragmatism and moderation by asking the current finance minister, who is well respected by investors, to stay on indefinitely. Sheinbaum’s decision to make such a key cabinet appointment this close to the election results is atypical. Investors interpret this move as a signal that that the Sheinbaum administration plans to run tight fiscal accounts similar to the AMLO administration. On the other hand, the recent meeting with AMLO and subsequent press conference show that there are limits with regard to Sheinbaum’s moderation. Sheinbaum made clear that while she is open to further consultation and discussion, her administration plans to move forward with some constitutional changes, particularly judicial reforms, as well as codifying some fiscal transfer payment programs. How Sheinbaum is able to assuage investor concerns on the constitutional changes, while at the same time still delivering for her base, will be a key signpost for Mexico’s trajectory. The extent to which reforms will be delayed or diluted, along with the true fiscal cost of proposed plans, are key variables that will only be defined over time and after further public debate. In the interim, we anticipate Mexican asset prices will remain vulnerable to these issues.

Investment opportunities

Although we harbor medium- to longer-term concerns with the consolidation of power and proposed constitutional changes, Mexico’s declining governance metrics are not a new development as these trends have been well in place over the past six years under AMLO. Despite these concerns, we believe there are interesting investment opportunities in Mexico. First, despite leftist tendencies for state involvement in the private sector and generous fiscal transfer payments, Mexico ran tight fiscal accounts under AMLO, even during Covid, when other countries spent aggressively. We expect the fiscal anchor to remain largely intact under Sheinbaum. Secondly, while the extent to which Mexico will benefit is still uncertain, the country is poised to attract increased foreign direct investment (FDI) and capital inflows due to the heightened geopolitical frictions between the US and China. Thirdly, remittances remain strong, and should continue to serve as an important contributor to current-account and balance-of-payments trends. Finally, Mexican local assets have some of the highest risk premia in all of the emerging markets (EM). Nominal yields are up to double digits while real yields (overnight rates less inflation) are still quite healthy on both a historical and intra-EM basis. Given these drivers, which we believe are less directly influenced by the election outcome, we continue to hold unhedged local government bond exposures in Mexico.