'Mexico's Bernie Sanders' could become the country's next president, and NAFTA may be toast

Financial Markets Reporter
Yahoo Finance
Andres Manuel Lopez Obrador, presidential candidate of the National Regeneration Movement (MORENA) gives a thumbs up to members of Partido del Trabajo (Labor Party), in Mexico City, Mexico February 19, 2018. REUTERS/Carlos Jasso
Andres Manuel Lopez Obrador, presidential candidate of the National Regeneration Movement (MORENA) gives a thumbs up to members of Partido del Trabajo (Labor Party), in Mexico City, Mexico February 19, 2018. REUTERS/Carlos Jasso

Andres Manuel Lopez Obrador, who has been called the Mexican Bernie Sanders because of his left-leaning and populist political bent, is increasingly becoming the man investors expect to become Mexico’s 58th president. With President Donald Trump in the White House, an AMLO win could be a nail in the coffin of NAFTA.

And some are OK with that.

Rather than selling out of Mexican assets because of the expectation that Lopez Obrador, who’s also referred to as AMLO, will win, Cathy Hepworth, managing director and co-head of the emerging market debt team at Prudential’s asset management arm PGIM Fixed Income, says her team has added to some of its positions in Mexican corporate and government bonds.

“I would characterize our outlook as constructive and that’s based on a greater than 50% chance that AMLO wins the election,” Hepworth said in a phone interview.

Despite leading in polls for some time, investors had previously believed that AMLO had no real chance at winning because of his hardline, left-wing political stance. He also has run for president twice before, coming up short in 2006 and 2012.

While Hepworth said she doesn’t have an exact percentage figure for Lopez Obrador’s chances, she says his consistently strong showing in polls and the high rejection rates for candidates representing Mexico’s traditional powers, the Revolutionary Institutional Party (PRI) and the National Action Party (PAN), make her believe he’s got a good shot.

Similarly, Alejo Czerwonko, emerging markets investment strategist at UBS Wealth Management, believes the former Mexico City mayor’s strong polling as well as his dominance over rivals on social media make his victory seem likely. AMLO has much larger penetration on Facebook and Twitter, measured in likes and followers, and the rate at which he’s increasing his online following is growing, rather than receding. Lopez Obrador has more than three times as many Twitter followers as the PRI’s Jose Antonio Meade and almost eight times as many as the PAN’s Ricardo Anaya Cortes.

“In current times that seems to us to be important,” said Czerwonko. “It’s been widening and the gap is large.”

Czerwonko is less bullish on Mexico with Lopez Obrador as its leader and his firm has reduced holdings of the Mexican peso in anticipation of July’s election.

Former World Bank president says NAFTA may not survive

Robert Zoellick, a former president of the World Bank and U.S. Trade Representative who now serves as chairman of asset manager Alliance Bernstein, told Yahoo Finance he also thinks it’s likely Lopez Obrador will occupy Mexico’s National Palace. And he sees a combination of AMLO in Los Pinos and Donald Trump in the White House as a potential end to the North American Free Trade Agreement.

“NAFTA may not survive this year,” Zoellick said.

Former World Bank President Robert Zoellick thinks an AMLO win means the end of NAFTA. REUTERS/Andres Stapff
Former World Bank President Robert Zoellick thinks an AMLO win means the end of NAFTA. REUTERS/Andres Stapff

The effects of pulling out of NAFTA probably would not be felt immediately, some analysts say, though the stock market and the countries’ respective currencies would likely suffer, putting even more pressure on the dollar. A failure to find a deal on NAFTA would likely hammer the Mexican peso.

Additionally, proponents estimate that 14 million jobs rely on the accord and that the jobs it has created pay better than those that have been lost. NAFTA also disproportionately benefits certain businesses, most notably the automobile and agriculture industries, which boast strong lobbies.

Pulling out of NAFTA could also boost inflation, causing the Federal Reserve to quicken its pace of monetary policy tightening — a possibility that has already sent U.S. stocks tumbling on multiple occasions this year.

The dissolution of NAFTA is something markets are not currently expecting and progress has stalled recently, with many of the toughest issues left to be addressed, said Win Thin, global head of emerging market currency strategy at Brown Brothers Harriman.

Thin agrees it’s likely AMLO will win the presidency but sees Trump as more of a risk to the free trade agreement than Lopez Obrador.

“The markets have been very sanguine but there’s a significant chance the U.S. pulls out unilaterally and that would be really bad for Canada and Mexico,” Thin said. “Markets are overlooking two big risks – the election risk in July and the NAFTA risks, which are ongoing.”

Dion Rabouin is a markets reporter for Yahoo Finance. Follow him on Twitter: @DionRabouin.

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