Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. I'm Stephen Carol and
Speaker 1: this is Here's Why, where we take one news story
Speaker 1: and explain it in just a few minutes with our
Speaker 1: experts here at Bloomberg. We've seen three sets of recent
Speaker 1: elections that have made waves on the markets. In South Africa,
Speaker 1: India and Mexico. We saw stocks sell off and currencies
Speaker 1: weaken as the results rolled in, even if they weren't
Speaker 1: a total surprise, volatility coming through in stock market indices
Speaker 1: where there have been these elections.
Speaker 2: Worst day in four years, three hundred and ninety billion
Speaker 2: dollars of market kept just wiped out. There were tail
Speaker 2: risks in all of these elections and they actually materialized.
Speaker 1: South Africa's election left the ruling ANC week and seeking
Speaker 1: coalition partners as polls have been suggesting. Indiasner Andromodi lost
Speaker 1: his majority in parliament, but he'll continue as Prime Minister
Speaker 1: with the help of his allies. And in Mexico, Cloudya
Speaker 1: Shinbaum was the clear favorite to become president and was
Speaker 1: duly elected by a wide margin. So here's why markets
Speaker 1: tumbled when election favorites one joining us to explain as
Speaker 1: our Markets Live Executive editor Mark Kudmore. We're talking here
Speaker 1: about three very different countries in vastly different parts of
Speaker 1: the world. But is there a common theme in the
Speaker 1: market reaction we've seen to these election results.
Speaker 2: The amount of volatility shows that there is complacent positioning there.
Speaker 2: So there is a common theme from the market side.
Speaker 2: From the election side, as you kind of outline, there's
Speaker 2: not really a common theme. Wan died better than expected,
Speaker 2: one died worse than expected, one died pretty much in
Speaker 2: line with the polls expectation. So the political stories are
Speaker 2: all very disyncratic. And what's really happened is the fundamentals
Speaker 2: in all these countries haven't really changed from the elections
Speaker 2: this week. This isn't a better fundamental shift. It was
Speaker 2: about this kind of story of elections suddenly putting these
Speaker 2: countries in the news that really blew out complacent positioning,
Speaker 2: and that triggered a real kind of volatility event, particularly
Speaker 2: in India and Mexico.
Speaker 1: Well, let's turn to Mexico. Then, the results there perhaps
Speaker 1: the least surprising. The expected candidate won and comfortably so,
Speaker 1: so what's gone on there?
Speaker 2: So the backfitted narrative here is that oh, with with
Speaker 2: the chance of a supermajority, maybe they'll start enacting some
Speaker 2: reforms that are less business friendly, less market friendly. Really,
Speaker 2: I just don't buy this at all. Like, Mexican peso
Speaker 2: has just had an incredible run for the last couple
Speaker 2: of years, and the fundamentals kind of suggested it run
Speaker 2: far enough by last month, And basically what you had.
Speaker 2: One of the main reasons the Mexican peso had done
Speaker 2: so well is because it was one of the best
Speaker 2: carry trades in the world. You earn a very high
Speaker 2: yield for parking your money in Mexican pay so and
Speaker 2: it was relatively low volatility, straight line appreciation. But the
Speaker 2: problem is with the Mexican election that was coming up
Speaker 2: ahead as of last month, and the fact they've got
Speaker 2: the US election later on this year, it means implied
Speaker 2: utility measures out the curve of risen and that means
Speaker 2: the carried of all ratio, which is what carried traders
Speaker 2: focus on, has deteriorated from Mexico. So therefore Mexico it's
Speaker 2: not necessarily a bad option for carriach traitors, but it
Speaker 2: suddenly went from being clearly one of the best in
Speaker 2: the world up for the last year or so until
Speaker 2: last month, but it was suddenly like nah, middle of
Speaker 2: the pack and not very exciting, And I think that's
Speaker 2: the real reason the Mexican pace has sold off suddenly.
Speaker 2: In all that complacent positioning, hadn't realised the fundamentals had changed. Suddenly,
Speaker 2: we've got a narrative putting it in the spotlight. Sells
Speaker 2: off badly and everyone blames it on the election results,
Speaker 2: but it's nothing really to do with the election.
Speaker 1: Let's turn to the Indian market reaction. We saw pretty big,
Speaker 1: biggest sell off in four years for stocks there, but
Speaker 1: actually those lasses were a cover within a couple of days,
Speaker 1: So why the excitement there.
Speaker 2: Yeah, this is a slightly strange one in terms of
Speaker 2: relative to Mexico and So Africa story. This is the
Speaker 2: one where there has generally been some arguably negative election
Speaker 2: news in the margin, but it's kind of a weird narrative.
Speaker 2: It's not massively negative to where we were a week ago.
Speaker 2: So a week ago before the final exit polls, we
Speaker 2: kind of thought that Mody would get a majority. That
Speaker 2: was kind of the base case. You know, he hasn't
Speaker 2: got a majority. He's gonna have to form a coalition.
Speaker 2: But that doesn't really change much in terms of what
Speaker 2: we're be able to do. He wasn't able to enact
Speaker 2: the major reform we wanted, business friendly reform when he
Speaker 2: had the majority, So the fact that he's got a
Speaker 2: coalition doesn't really change that narrative. The problem was that
Speaker 2: on Sunday we got these exit poles which suggested that
Speaker 2: he might get a super majority which would enable him
Speaker 2: to next stuff. So what happened is we suddenly got
Speaker 2: this big rally on Monday based in those polls because
Speaker 2: it was like, Wow, it's a better outcome than we
Speaker 2: expected going to the weekend. Choose do that turned out? Now,
Speaker 2: the history of an Indian exit poles is actually quite flawed,
Speaker 2: so we should have taken it with a large pitch
Speaker 2: of sault. We entered on Tuesday, found out the results
Speaker 2: were much more negative from Mody, And what happened is
Speaker 2: we didn't just unwind the premium from Monday. We suddenly panicked.
Speaker 2: And again it was about complacent positioning, and he goes
Speaker 2: back to the initial kind of question. Was the common
Speaker 2: theme here volatility and placent positioning. Indian assets, particularly Indian
Speaker 2: stocks were kind of priced for perfection going on to
Speaker 2: this event. And Monday kind of added a little bit
Speaker 2: of the cherry on top of perfection, and therefore that
Speaker 2: got hit and got unwound. I think Indian stocks will
Speaker 2: have a little bit of a problem making outsized gains
Speaker 2: from here, not because the story has turned negative, not
Speaker 2: because of the fundamental story, but just they're already priced
Speaker 2: extremely well and they need the world to stay wonderful
Speaker 2: making gains. So I don't expect India to continue being
Speaker 2: outperformers in global stock markets in the second half this year.
Speaker 1: Okay, Mark, does this mean that we just need to
Speaker 1: be more prepared for this sort of thing to happen
Speaker 1: in the future.
Speaker 2: It's a reminder that traders tend to look We all
Speaker 2: do this. We kind of fit narratives to events after
Speaker 2: the fact, and knowing that that it's stories are sometimes
Speaker 2: backfitted to what the price action is. Sometimes it's a
Speaker 2: good idea to be extremely attuned to when there might
Speaker 2: be a catalyst to change the narrative. And that's a
Speaker 2: reminder that going into these catalysts, to look at those fundamentals.
Speaker 2: So if you know, last month you kind of looked
Speaker 2: at like the Mexican carriage trade that's been WONDERU the
Speaker 2: last couple years too gone. Oh, Actually the risk award's
Speaker 2: pretty poor now because implied volatility's gone uploads and you
Speaker 2: would have gone, oh, I better get out of this position.
Speaker 2: It's the same I think with India and had gone
Speaker 2: oh okay. Stocks are priced like one of the most
Speaker 2: expensive in the world. They're priced expensive compared to almost
Speaker 2: over the stock market in the world. They're priced expensive
Speaker 2: compared to their own history. Yeah, it's a wonderful structural story,
Speaker 2: but haven't we priced it enough? And I think that's
Speaker 2: the kind of idea. These bigger news events are prompts
Speaker 2: that before going into them, you should check your fundamentals
Speaker 2: up to date.
Speaker 1: And you should read the Market's Live blog. Mark Codmore,
Speaker 1: our executive editor for Markets Live, thank you very much
Speaker 1: for joining us. For more explanations like this from our
Speaker 1: team of twenty seven hundred journalists and analysts around the world.
Speaker 1: Search for Quick Take on the Bloomberg website or Bloomberg
Speaker 1: Business app. I'm Stephen Carol. This is here's why. I'll
Speaker 1: be back next week with more. Thanks for listening.