1 00:00:02,800 --> 00:00:11,160 Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. I'm Stephen Carol and 2 00:00:11,280 --> 00:00:14,000 Speaker 1: this is Here's Why, where we take one news story 3 00:00:14,000 --> 00:00:16,160 Speaker 1: and explain it in just a few minutes with our 4 00:00:16,200 --> 00:00:22,760 Speaker 1: experts here at Bloomberg. We've seen three sets of recent 5 00:00:22,840 --> 00:00:26,360 Speaker 1: elections that have made waves on the markets. In South Africa, 6 00:00:26,520 --> 00:00:30,160 Speaker 1: India and Mexico. We saw stocks sell off and currencies 7 00:00:30,160 --> 00:00:33,680 Speaker 1: weaken as the results rolled in, even if they weren't 8 00:00:33,720 --> 00:00:39,640 Speaker 1: a total surprise, volatility coming through in stock market indices 9 00:00:39,880 --> 00:00:42,600 Speaker 1: where there have been these elections. 10 00:00:43,360 --> 00:00:46,120 Speaker 2: Worst day in four years, three hundred and ninety billion 11 00:00:46,159 --> 00:00:50,600 Speaker 2: dollars of market kept just wiped out. There were tail 12 00:00:50,640 --> 00:00:53,640 Speaker 2: risks in all of these elections and they actually materialized. 13 00:00:57,240 --> 00:01:00,920 Speaker 1: South Africa's election left the ruling ANC week and seeking 14 00:01:00,960 --> 00:01:05,720 Speaker 1: coalition partners as polls have been suggesting. Indiasner Andromodi lost 15 00:01:05,720 --> 00:01:08,880 Speaker 1: his majority in parliament, but he'll continue as Prime Minister 16 00:01:09,160 --> 00:01:12,360 Speaker 1: with the help of his allies. And in Mexico, Cloudya 17 00:01:12,400 --> 00:01:15,320 Speaker 1: Shinbaum was the clear favorite to become president and was 18 00:01:15,400 --> 00:01:19,600 Speaker 1: duly elected by a wide margin. So here's why markets 19 00:01:19,680 --> 00:01:23,960 Speaker 1: tumbled when election favorites one joining us to explain as 20 00:01:24,000 --> 00:01:27,440 Speaker 1: our Markets Live Executive editor Mark Kudmore. We're talking here 21 00:01:27,480 --> 00:01:30,480 Speaker 1: about three very different countries in vastly different parts of 22 00:01:30,520 --> 00:01:32,800 Speaker 1: the world. But is there a common theme in the 23 00:01:32,840 --> 00:01:35,200 Speaker 1: market reaction we've seen to these election results. 24 00:01:35,520 --> 00:01:39,080 Speaker 2: The amount of volatility shows that there is complacent positioning there. 25 00:01:39,120 --> 00:01:41,920 Speaker 2: So there is a common theme from the market side. 26 00:01:42,000 --> 00:01:44,240 Speaker 2: From the election side, as you kind of outline, there's 27 00:01:44,280 --> 00:01:46,560 Speaker 2: not really a common theme. Wan died better than expected, 28 00:01:46,640 --> 00:01:48,680 Speaker 2: one died worse than expected, one died pretty much in 29 00:01:48,720 --> 00:01:51,280 Speaker 2: line with the polls expectation. So the political stories are 30 00:01:51,320 --> 00:01:54,720 Speaker 2: all very disyncratic. And what's really happened is the fundamentals 31 00:01:54,720 --> 00:01:57,640 Speaker 2: in all these countries haven't really changed from the elections 32 00:01:57,640 --> 00:02:00,320 Speaker 2: this week. This isn't a better fundamental shift. It was 33 00:02:00,400 --> 00:02:03,720 Speaker 2: about this kind of story of elections suddenly putting these 34 00:02:03,720 --> 00:02:06,760 Speaker 2: countries in the news that really blew out complacent positioning, 35 00:02:06,800 --> 00:02:09,880 Speaker 2: and that triggered a real kind of volatility event, particularly 36 00:02:09,960 --> 00:02:10,960 Speaker 2: in India and Mexico. 37 00:02:11,360 --> 00:02:14,080 Speaker 1: Well, let's turn to Mexico. Then, the results there perhaps 38 00:02:14,160 --> 00:02:17,519 Speaker 1: the least surprising. The expected candidate won and comfortably so, 39 00:02:17,520 --> 00:02:18,520 Speaker 1: so what's gone on there? 40 00:02:18,840 --> 00:02:22,160 Speaker 2: So the backfitted narrative here is that oh, with with 41 00:02:22,240 --> 00:02:25,320 Speaker 2: the chance of a supermajority, maybe they'll start enacting some 42 00:02:25,400 --> 00:02:28,000 Speaker 2: reforms that are less business friendly, less market friendly. Really, 43 00:02:28,080 --> 00:02:30,800 Speaker 2: I just don't buy this at all. Like, Mexican peso 44 00:02:30,840 --> 00:02:33,160 Speaker 2: has just had an incredible run for the last couple 45 00:02:33,200 --> 00:02:36,959 Speaker 2: of years, and the fundamentals kind of suggested it run 46 00:02:37,040 --> 00:02:40,160 Speaker 2: far enough by last month, And basically what you had. 47 00:02:40,320 --> 00:02:42,079 Speaker 2: One of the main reasons the Mexican peso had done 48 00:02:42,120 --> 00:02:44,040 Speaker 2: so well is because it was one of the best 49 00:02:44,080 --> 00:02:46,200 Speaker 2: carry trades in the world. You earn a very high 50 00:02:46,240 --> 00:02:48,680 Speaker 2: yield for parking your money in Mexican pay so and 51 00:02:48,720 --> 00:02:52,760 Speaker 2: it was relatively low volatility, straight line appreciation. But the 52 00:02:52,800 --> 00:02:55,560 Speaker 2: problem is with the Mexican election that was coming up 53 00:02:55,600 --> 00:02:57,320 Speaker 2: ahead as of last month, and the fact they've got 54 00:02:57,360 --> 00:02:59,760 Speaker 2: the US election later on this year, it means implied 55 00:03:00,080 --> 00:03:02,520 Speaker 2: utility measures out the curve of risen and that means 56 00:03:02,520 --> 00:03:05,160 Speaker 2: the carried of all ratio, which is what carried traders 57 00:03:05,160 --> 00:03:08,600 Speaker 2: focus on, has deteriorated from Mexico. So therefore Mexico it's 58 00:03:08,600 --> 00:03:10,880 Speaker 2: not necessarily a bad option for carriach traitors, but it 59 00:03:10,960 --> 00:03:12,920 Speaker 2: suddenly went from being clearly one of the best in 60 00:03:12,960 --> 00:03:15,480 Speaker 2: the world up for the last year or so until 61 00:03:15,520 --> 00:03:17,760 Speaker 2: last month, but it was suddenly like nah, middle of 62 00:03:17,800 --> 00:03:20,000 Speaker 2: the pack and not very exciting, And I think that's 63 00:03:20,040 --> 00:03:22,000 Speaker 2: the real reason the Mexican pace has sold off suddenly. 64 00:03:22,040 --> 00:03:25,639 Speaker 2: In all that complacent positioning, hadn't realised the fundamentals had changed. Suddenly, 65 00:03:25,680 --> 00:03:28,359 Speaker 2: we've got a narrative putting it in the spotlight. Sells 66 00:03:28,360 --> 00:03:30,640 Speaker 2: off badly and everyone blames it on the election results, 67 00:03:30,680 --> 00:03:32,079 Speaker 2: but it's nothing really to do with the election. 68 00:03:32,320 --> 00:03:36,280 Speaker 1: Let's turn to the Indian market reaction. We saw pretty big, 69 00:03:36,880 --> 00:03:39,280 Speaker 1: biggest sell off in four years for stocks there, but 70 00:03:39,320 --> 00:03:41,880 Speaker 1: actually those lasses were a cover within a couple of days, 71 00:03:41,960 --> 00:03:43,680 Speaker 1: So why the excitement there. 72 00:03:44,280 --> 00:03:46,840 Speaker 2: Yeah, this is a slightly strange one in terms of 73 00:03:47,400 --> 00:03:51,000 Speaker 2: relative to Mexico and So Africa story. This is the 74 00:03:51,040 --> 00:03:55,160 Speaker 2: one where there has generally been some arguably negative election 75 00:03:55,280 --> 00:03:57,840 Speaker 2: news in the margin, but it's kind of a weird narrative. 76 00:03:57,920 --> 00:04:01,960 Speaker 2: It's not massively negative to where we were a week ago. 77 00:04:02,040 --> 00:04:04,160 Speaker 2: So a week ago before the final exit polls, we 78 00:04:04,240 --> 00:04:05,920 Speaker 2: kind of thought that Mody would get a majority. That 79 00:04:05,960 --> 00:04:08,040 Speaker 2: was kind of the base case. You know, he hasn't 80 00:04:08,040 --> 00:04:09,760 Speaker 2: got a majority. He's gonna have to form a coalition. 81 00:04:09,960 --> 00:04:12,240 Speaker 2: But that doesn't really change much in terms of what 82 00:04:12,240 --> 00:04:14,240 Speaker 2: we're be able to do. He wasn't able to enact 83 00:04:14,320 --> 00:04:16,880 Speaker 2: the major reform we wanted, business friendly reform when he 84 00:04:16,920 --> 00:04:18,360 Speaker 2: had the majority, So the fact that he's got a 85 00:04:18,400 --> 00:04:21,480 Speaker 2: coalition doesn't really change that narrative. The problem was that 86 00:04:21,520 --> 00:04:23,839 Speaker 2: on Sunday we got these exit poles which suggested that 87 00:04:23,880 --> 00:04:27,120 Speaker 2: he might get a super majority which would enable him 88 00:04:27,160 --> 00:04:28,760 Speaker 2: to next stuff. So what happened is we suddenly got 89 00:04:28,800 --> 00:04:31,200 Speaker 2: this big rally on Monday based in those polls because 90 00:04:31,200 --> 00:04:33,039 Speaker 2: it was like, Wow, it's a better outcome than we 91 00:04:33,080 --> 00:04:35,680 Speaker 2: expected going to the weekend. Choose do that turned out? Now, 92 00:04:35,720 --> 00:04:38,599 Speaker 2: the history of an Indian exit poles is actually quite flawed, 93 00:04:38,640 --> 00:04:39,960 Speaker 2: so we should have taken it with a large pitch 94 00:04:39,960 --> 00:04:42,600 Speaker 2: of sault. We entered on Tuesday, found out the results 95 00:04:42,600 --> 00:04:45,320 Speaker 2: were much more negative from Mody, And what happened is 96 00:04:45,440 --> 00:04:49,360 Speaker 2: we didn't just unwind the premium from Monday. We suddenly panicked. 97 00:04:49,360 --> 00:04:51,760 Speaker 2: And again it was about complacent positioning, and he goes 98 00:04:51,800 --> 00:04:53,839 Speaker 2: back to the initial kind of question. Was the common 99 00:04:53,880 --> 00:04:57,679 Speaker 2: theme here volatility and placent positioning. Indian assets, particularly Indian 100 00:04:57,720 --> 00:05:00,159 Speaker 2: stocks were kind of priced for perfection going on to 101 00:05:00,200 --> 00:05:02,400 Speaker 2: this event. And Monday kind of added a little bit 102 00:05:02,400 --> 00:05:05,120 Speaker 2: of the cherry on top of perfection, and therefore that 103 00:05:05,160 --> 00:05:07,880 Speaker 2: got hit and got unwound. I think Indian stocks will 104 00:05:08,080 --> 00:05:10,040 Speaker 2: have a little bit of a problem making outsized gains 105 00:05:10,040 --> 00:05:12,280 Speaker 2: from here, not because the story has turned negative, not 106 00:05:12,320 --> 00:05:14,840 Speaker 2: because of the fundamental story, but just they're already priced 107 00:05:14,880 --> 00:05:17,760 Speaker 2: extremely well and they need the world to stay wonderful 108 00:05:17,800 --> 00:05:20,599 Speaker 2: making gains. So I don't expect India to continue being 109 00:05:20,680 --> 00:05:23,120 Speaker 2: outperformers in global stock markets in the second half this year. 110 00:05:23,720 --> 00:05:26,320 Speaker 1: Okay, Mark, does this mean that we just need to 111 00:05:26,360 --> 00:05:28,239 Speaker 1: be more prepared for this sort of thing to happen 112 00:05:28,240 --> 00:05:28,839 Speaker 1: in the future. 113 00:05:29,200 --> 00:05:33,720 Speaker 2: It's a reminder that traders tend to look We all 114 00:05:33,760 --> 00:05:36,799 Speaker 2: do this. We kind of fit narratives to events after 115 00:05:36,839 --> 00:05:39,920 Speaker 2: the fact, and knowing that that it's stories are sometimes 116 00:05:39,960 --> 00:05:42,280 Speaker 2: backfitted to what the price action is. Sometimes it's a 117 00:05:42,320 --> 00:05:45,040 Speaker 2: good idea to be extremely attuned to when there might 118 00:05:45,080 --> 00:05:47,800 Speaker 2: be a catalyst to change the narrative. And that's a 119 00:05:47,839 --> 00:05:50,760 Speaker 2: reminder that going into these catalysts, to look at those fundamentals. 120 00:05:50,800 --> 00:05:52,840 Speaker 2: So if you know, last month you kind of looked 121 00:05:52,839 --> 00:05:54,560 Speaker 2: at like the Mexican carriage trade that's been WONDERU the 122 00:05:54,600 --> 00:05:56,520 Speaker 2: last couple years too gone. Oh, Actually the risk award's 123 00:05:56,520 --> 00:05:59,359 Speaker 2: pretty poor now because implied volatility's gone uploads and you 124 00:05:59,360 --> 00:06:01,000 Speaker 2: would have gone, oh, I better get out of this position. 125 00:06:01,320 --> 00:06:02,880 Speaker 2: It's the same I think with India and had gone 126 00:06:02,920 --> 00:06:05,520 Speaker 2: oh okay. Stocks are priced like one of the most 127 00:06:05,520 --> 00:06:08,120 Speaker 2: expensive in the world. They're priced expensive compared to almost 128 00:06:08,160 --> 00:06:09,880 Speaker 2: over the stock market in the world. They're priced expensive 129 00:06:09,880 --> 00:06:12,719 Speaker 2: compared to their own history. Yeah, it's a wonderful structural story, 130 00:06:12,720 --> 00:06:14,480 Speaker 2: but haven't we priced it enough? And I think that's 131 00:06:14,480 --> 00:06:18,200 Speaker 2: the kind of idea. These bigger news events are prompts 132 00:06:18,200 --> 00:06:20,760 Speaker 2: that before going into them, you should check your fundamentals 133 00:06:20,920 --> 00:06:21,440 Speaker 2: up to date. 134 00:06:21,880 --> 00:06:24,240 Speaker 1: And you should read the Market's Live blog. Mark Codmore, 135 00:06:24,400 --> 00:06:26,720 Speaker 1: our executive editor for Markets Live, thank you very much 136 00:06:26,760 --> 00:06:29,600 Speaker 1: for joining us. For more explanations like this from our 137 00:06:29,640 --> 00:06:32,800 Speaker 1: team of twenty seven hundred journalists and analysts around the world. 138 00:06:32,960 --> 00:06:35,719 Speaker 1: Search for Quick Take on the Bloomberg website or Bloomberg 139 00:06:35,800 --> 00:06:40,400 Speaker 1: Business app. I'm Stephen Carol. This is here's why. I'll 140 00:06:40,440 --> 00:06:43,000 Speaker 1: be back next week with more. Thanks for listening.