Boost for EM stocks and currencies amid elections

by Giovanna Bellotti Azevedo and Andras Gergely

Emerging-market equities jumped by the most this year and currencies edged higher as investors digested the results from key elections across the globe. 

MSCI Inc.’s gauge for currencies advanced 0.2%, led higher by gains in the rand as investors sorted through results from last week’s election in South Africa. The Mexican peso plummeted, meanwhile, in the wake of a landslide victory by the ruling party and its presidential candidate Claudia Sheinbaum, according to preliminary results. 

The peso weakened as much as 4.3%, denting an otherwise positive day for Latin American currencies. Investors are concerned that the Morena party will increase state control of the economy and undermine checks on its power. Mexican stocks fell 6%.

The Morena Party getting full control of Congress and in turn being able to make constitutional changes is seen as a “big negative,” said Marco Oviedo, a senior strategist at XP Investimentos. 

The broader index for developing world equities closed 1.9% higher on Monday, its biggest gain since December, as Asian tech jumped after China reported strong manufacturing activity.

The so-called “super peso” had been ranking as the best performer among major currencies tracked by Bloomberg. According to Luis Estrada, Latin America FX strategist at RBC Capital Markets, the peso trade is not over, despite the sell off. 

“There are no bad assets, just bad prices, and the Mexican peso is finding its price in this new political reality,” he said.

Elsewhere, Indian stocks surged to a record, while the rupee and sovereign bonds climbed after exit polls signaled an emphatic victory for Prime Minister Narendra Modi’s ruling party.

The impact from elections may continue to move market this week even as the European Central Bank is expected to cut rates. 

“In addition to central bank policy meetings overseas this week, the market will be looking at the fall-out of election results in Mexico and South Africa,” ING strategist Chris Turnerwrote in a note.

Deutsche Bank recommended entering tactical long positions in the dollar versus the rand on the basis that the market hasn’t fully priced in the risks surrounding the South African coalition talks.

“The chances of a messy political process over the coming weeks remains high,” Deutsche Bank said in a note. “Even if the most likely outcome remains another ANC government in the end, there is every possibility this could be weak and relatively unstable, raising concerns about policy delivery."

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