Salsa Time!

Mexican equities are letting us back in

Salsa Time!

Ok, ok! I know that the Salsa dance is like pizza, another form of New York cultural appropriation, but the 🐿️’s editors did not believe that “Jarabe Tapatío Time!” would boost this email’s open rate.

In Section 2 of this Monday’s note (for paid subs), we wondered whether or not the ‘go woke, go broke’ crew were going to lose their shirts trading their politics (again)!

“Are they making the same mistake in writing off Mexico, one of the best performing emerging markets of recent years, “because they have elected a communist as Presidenta?”

I have now released that part the note from behind the 🐿️ paywall 👇for the background to our bullish view on Mexican equities.

Section 2 on Mexico

Implementation Plan

We have now allowed for 3 days for the post-election dust to settle. The long-term upward trend line from the pandemic lows has been breached. I am not convinced that it stays below this line for long. As is always the case when a crowded trade needs to be unwound in a hurry, the drawdown can be pretty rough.

But what have we learned so far (beyond the fact that greedy carry traders ALWAYS push a good thing too far)?

1. Serious people have now calmed down and have had the time to do enough background reading to establish that Claudia Sheinbaum is NOT in fact the illegitimate offspring of Che Guevara and Greta Thunberg.

2. Presidenta-elect Sheinbaum and her Morena party do NOT have the supermajority across both houses of Congress that would allow them to force through changes to the Mexican constitution. They fell short by 4 seats in the Senate.

3. Technically, there is a 4-week window between the new Congress taking office and Sheinbaum being sworn in during which AMLO, the outgoing president could ‘horse trade’ his new constitutional package through the Senate.

4. AMLO’s reform package remains very light on detail but the idea of major pension reforms without the support of a clear funding package is the kind of thing that spooks currency and FX markets. Politicians, even populist ones, have seen that strategy play out badly (just ask Liz Truss!). Mexico has just elected a centrist technocrat to the Presidential palace. The country did not vote for market chaos. Tough to see these changes being forced through.

5. However, equity and FX markets, which had not priced the possibility of a Morena supermajority ‘sweep’ ahead of the vote are now not yet prepared to fully discount the policy risk of constitutional changes that they did not view as even a remote risk less than a week ago.

The 🐿️ has a hunch that the discounting process will start soon. Meanwhile Mexican risk assets are de rebajas (on sale)! This rodent likes discounts, and we have even found a discount on the discount! There is also a ‘hot sauce’ ‘kicker’!