Emerging markets sit this week between two important elections. In Turkey last weekend, President Erdoğan secured another term, and a parliamentary majority. In Mexico this coming weekend, AMLO (Andrés Manuel López Obrador) is a clear favourite to emerge as winner in the country’s presidential elections, while the control he secures over Congress is less certain. How do we view both events?
In Turkey, President Erdoğan’s dual victory on Sunday was met with only the briefest of rallies the following day in the Turkish lira, before it snapped out again versus the US dollar. While Erdoğan’s re-election offers markets continuity, structural challenges remain: a high current account deficit, a weak currency, and rising concerns on the quality of growth all testify to Turkey’s vulnerability at a time of US dollar strength. On the political front, Erdoğan’s ongoing undermining of both central bank independence and civil society should concern investors.
Despite Turkish sovereign spreads appearing optically cheap for the country’s BB rating, we retain an underweight in the country, avoiding exposure to the sovereign, and instead favouring selected corporates where we believe the bottom-up stories are strong enough to offset the headwinds at the macro level, offering value at the same time.
In Mexico, markets wait to see if AMLO will prove a President more in the mould of Brazil’s Lula, or Venezuela’s Chávez. A strong performance for AMLO’s Morena party in Congress, in addition to his winning the presidency, could steel his more radical side in the months ahead. On the other hand, as Mayor of Mexico City, AMLO played a relatively constructive role, with Mexican blue-chips such as Cemex having a positive experience working with him.
We remain cautious. While the US President is upping the ante regarding global trade, including of course with regard to negotiations around NAFTA, the temptation to fight fire with fire might prove too great to resist. While Mexico is an economy that enjoys stronger fundamentals than Turkey, a meaningful deterioration in Mexican-US relations could quickly prove damaging. We think Mexican assets are ones to avoid at this time.
For both Mexico and Turkey, elections come at a time of heightened global strain, economically and politically. Positioning away from them makes sense.