WEBVTT - Here's Why Markets Tumbled When Election Favorites Won

0:00:02.800 --> 0:00:11.160
<v Speaker 1>Bloomberg Audio Studios, Podcasts, radio News. I'm Stephen Carol and

0:00:11.280 --> 0:00:14.000
<v Speaker 1>this is Here's Why, where we take one news story

0:00:14.000 --> 0:00:16.160
<v Speaker 1>and explain it in just a few minutes with our

0:00:16.200 --> 0:00:22.760
<v Speaker 1>experts here at Bloomberg. We've seen three sets of recent

0:00:22.840 --> 0:00:26.360
<v Speaker 1>elections that have made waves on the markets. In South Africa,

0:00:26.520 --> 0:00:30.160
<v Speaker 1>India and Mexico. We saw stocks sell off and currencies

0:00:30.160 --> 0:00:33.680
<v Speaker 1>weaken as the results rolled in, even if they weren't

0:00:33.720 --> 0:00:39.640
<v Speaker 1>a total surprise, volatility coming through in stock market indices

0:00:39.880 --> 0:00:42.600
<v Speaker 1>where there have been these elections.

0:00:43.360 --> 0:00:46.120
<v Speaker 2>Worst day in four years, three hundred and ninety billion

0:00:46.159 --> 0:00:50.600
<v Speaker 2>dollars of market kept just wiped out. There were tail

0:00:50.640 --> 0:00:53.640
<v Speaker 2>risks in all of these elections and they actually materialized.

0:00:57.240 --> 0:01:00.920
<v Speaker 1>South Africa's election left the ruling ANC week and seeking

0:01:00.960 --> 0:01:05.720
<v Speaker 1>coalition partners as polls have been suggesting. Indiasner Andromodi lost

0:01:05.720 --> 0:01:08.880
<v Speaker 1>his majority in parliament, but he'll continue as Prime Minister

0:01:09.160 --> 0:01:12.360
<v Speaker 1>with the help of his allies. And in Mexico, Cloudya

0:01:12.400 --> 0:01:15.320
<v Speaker 1>Shinbaum was the clear favorite to become president and was

0:01:15.400 --> 0:01:19.600
<v Speaker 1>duly elected by a wide margin. So here's why markets

0:01:19.680 --> 0:01:23.960
<v Speaker 1>tumbled when election favorites one joining us to explain as

0:01:24.000 --> 0:01:27.440
<v Speaker 1>our Markets Live Executive editor Mark Kudmore. We're talking here

0:01:27.480 --> 0:01:30.480
<v Speaker 1>about three very different countries in vastly different parts of

0:01:30.520 --> 0:01:32.800
<v Speaker 1>the world. But is there a common theme in the

0:01:32.840 --> 0:01:35.200
<v Speaker 1>market reaction we've seen to these election results.

0:01:35.520 --> 0:01:39.080
<v Speaker 2>The amount of volatility shows that there is complacent positioning there.

0:01:39.120 --> 0:01:41.920
<v Speaker 2>So there is a common theme from the market side.

0:01:42.000 --> 0:01:44.240
<v Speaker 2>From the election side, as you kind of outline, there's

0:01:44.280 --> 0:01:46.560
<v Speaker 2>not really a common theme. Wan died better than expected,

0:01:46.640 --> 0:01:48.680
<v Speaker 2>one died worse than expected, one died pretty much in

0:01:48.720 --> 0:01:51.280
<v Speaker 2>line with the polls expectation. So the political stories are

0:01:51.320 --> 0:01:54.720
<v Speaker 2>all very disyncratic. And what's really happened is the fundamentals

0:01:54.720 --> 0:01:57.640
<v Speaker 2>in all these countries haven't really changed from the elections

0:01:57.640 --> 0:02:00.320
<v Speaker 2>this week. This isn't a better fundamental shift. It was

0:02:00.400 --> 0:02:03.720
<v Speaker 2>about this kind of story of elections suddenly putting these

0:02:03.720 --> 0:02:06.760
<v Speaker 2>countries in the news that really blew out complacent positioning,

0:02:06.800 --> 0:02:09.880
<v Speaker 2>and that triggered a real kind of volatility event, particularly

0:02:09.960 --> 0:02:10.960
<v Speaker 2>in India and Mexico.

0:02:11.360 --> 0:02:14.080
<v Speaker 1>Well, let's turn to Mexico. Then, the results there perhaps

0:02:14.160 --> 0:02:17.519
<v Speaker 1>the least surprising. The expected candidate won and comfortably so,

0:02:17.520 --> 0:02:18.520
<v Speaker 1>so what's gone on there?

0:02:18.840 --> 0:02:22.160
<v Speaker 2>So the backfitted narrative here is that oh, with with

0:02:22.240 --> 0:02:25.320
<v Speaker 2>the chance of a supermajority, maybe they'll start enacting some

0:02:25.400 --> 0:02:28.000
<v Speaker 2>reforms that are less business friendly, less market friendly. Really,

0:02:28.080 --> 0:02:30.800
<v Speaker 2>I just don't buy this at all. Like, Mexican peso

0:02:30.840 --> 0:02:33.160
<v Speaker 2>has just had an incredible run for the last couple

0:02:33.200 --> 0:02:36.959
<v Speaker 2>of years, and the fundamentals kind of suggested it run

0:02:37.040 --> 0:02:40.160
<v Speaker 2>far enough by last month, And basically what you had.

0:02:40.320 --> 0:02:42.079
<v Speaker 2>One of the main reasons the Mexican peso had done

0:02:42.120 --> 0:02:44.040
<v Speaker 2>so well is because it was one of the best

0:02:44.080 --> 0:02:46.200
<v Speaker 2>carry trades in the world. You earn a very high

0:02:46.240 --> 0:02:48.680
<v Speaker 2>yield for parking your money in Mexican pay so and

0:02:48.720 --> 0:02:52.760
<v Speaker 2>it was relatively low volatility, straight line appreciation. But the

0:02:52.800 --> 0:02:55.560
<v Speaker 2>problem is with the Mexican election that was coming up

0:02:55.600 --> 0:02:57.320
<v Speaker 2>ahead as of last month, and the fact they've got

0:02:57.360 --> 0:02:59.760
<v Speaker 2>the US election later on this year, it means implied

0:03:00.080 --> 0:03:02.520
<v Speaker 2>utility measures out the curve of risen and that means

0:03:02.520 --> 0:03:05.160
<v Speaker 2>the carried of all ratio, which is what carried traders

0:03:05.160 --> 0:03:08.600
<v Speaker 2>focus on, has deteriorated from Mexico. So therefore Mexico it's

0:03:08.600 --> 0:03:10.880
<v Speaker 2>not necessarily a bad option for carriach traitors, but it

0:03:10.960 --> 0:03:12.920
<v Speaker 2>suddenly went from being clearly one of the best in

0:03:12.960 --> 0:03:15.480
<v Speaker 2>the world up for the last year or so until

0:03:15.520 --> 0:03:17.760
<v Speaker 2>last month, but it was suddenly like nah, middle of

0:03:17.800 --> 0:03:20.000
<v Speaker 2>the pack and not very exciting, And I think that's

0:03:20.040 --> 0:03:22.000
<v Speaker 2>the real reason the Mexican pace has sold off suddenly.

0:03:22.040 --> 0:03:25.639
<v Speaker 2>In all that complacent positioning, hadn't realised the fundamentals had changed. Suddenly,

0:03:25.680 --> 0:03:28.359
<v Speaker 2>we've got a narrative putting it in the spotlight. Sells

0:03:28.360 --> 0:03:30.640
<v Speaker 2>off badly and everyone blames it on the election results,

0:03:30.680 --> 0:03:32.079
<v Speaker 2>but it's nothing really to do with the election.

0:03:32.320 --> 0:03:36.280
<v Speaker 1>Let's turn to the Indian market reaction. We saw pretty big,

0:03:36.880 --> 0:03:39.280
<v Speaker 1>biggest sell off in four years for stocks there, but

0:03:39.320 --> 0:03:41.880
<v Speaker 1>actually those lasses were a cover within a couple of days,

0:03:41.960 --> 0:03:43.680
<v Speaker 1>So why the excitement there.

0:03:44.280 --> 0:03:46.840
<v Speaker 2>Yeah, this is a slightly strange one in terms of

0:03:47.400 --> 0:03:51.000
<v Speaker 2>relative to Mexico and So Africa story. This is the

0:03:51.040 --> 0:03:55.160
<v Speaker 2>one where there has generally been some arguably negative election

0:03:55.280 --> 0:03:57.840
<v Speaker 2>news in the margin, but it's kind of a weird narrative.

0:03:57.920 --> 0:04:01.960
<v Speaker 2>It's not massively negative to where we were a week ago.

0:04:02.040 --> 0:04:04.160
<v Speaker 2>So a week ago before the final exit polls, we

0:04:04.240 --> 0:04:05.920
<v Speaker 2>kind of thought that Mody would get a majority. That

0:04:05.960 --> 0:04:08.040
<v Speaker 2>was kind of the base case. You know, he hasn't

0:04:08.040 --> 0:04:09.760
<v Speaker 2>got a majority. He's gonna have to form a coalition.

0:04:09.960 --> 0:04:12.240
<v Speaker 2>But that doesn't really change much in terms of what

0:04:12.240 --> 0:04:14.240
<v Speaker 2>we're be able to do. He wasn't able to enact

0:04:14.320 --> 0:04:16.880
<v Speaker 2>the major reform we wanted, business friendly reform when he

0:04:16.920 --> 0:04:18.360
<v Speaker 2>had the majority, So the fact that he's got a

0:04:18.400 --> 0:04:21.480
<v Speaker 2>coalition doesn't really change that narrative. The problem was that

0:04:21.520 --> 0:04:23.839
<v Speaker 2>on Sunday we got these exit poles which suggested that

0:04:23.880 --> 0:04:27.120
<v Speaker 2>he might get a super majority which would enable him

0:04:27.160 --> 0:04:28.760
<v Speaker 2>to next stuff. So what happened is we suddenly got

0:04:28.800 --> 0:04:31.200
<v Speaker 2>this big rally on Monday based in those polls because

0:04:31.200 --> 0:04:33.039
<v Speaker 2>it was like, Wow, it's a better outcome than we

0:04:33.080 --> 0:04:35.680
<v Speaker 2>expected going to the weekend. Choose do that turned out? Now,

0:04:35.720 --> 0:04:38.599
<v Speaker 2>the history of an Indian exit poles is actually quite flawed,

0:04:38.640 --> 0:04:39.960
<v Speaker 2>so we should have taken it with a large pitch

0:04:39.960 --> 0:04:42.600
<v Speaker 2>of sault. We entered on Tuesday, found out the results

0:04:42.600 --> 0:04:45.320
<v Speaker 2>were much more negative from Mody, And what happened is

0:04:45.440 --> 0:04:49.360
<v Speaker 2>we didn't just unwind the premium from Monday. We suddenly panicked.

0:04:49.360 --> 0:04:51.760
<v Speaker 2>And again it was about complacent positioning, and he goes

0:04:51.800 --> 0:04:53.839
<v Speaker 2>back to the initial kind of question. Was the common

0:04:53.880 --> 0:04:57.679
<v Speaker 2>theme here volatility and placent positioning. Indian assets, particularly Indian

0:04:57.720 --> 0:05:00.159
<v Speaker 2>stocks were kind of priced for perfection going on to

0:05:00.200 --> 0:05:02.400
<v Speaker 2>this event. And Monday kind of added a little bit

0:05:02.400 --> 0:05:05.120
<v Speaker 2>of the cherry on top of perfection, and therefore that

0:05:05.160 --> 0:05:07.880
<v Speaker 2>got hit and got unwound. I think Indian stocks will

0:05:08.080 --> 0:05:10.040
<v Speaker 2>have a little bit of a problem making outsized gains

0:05:10.040 --> 0:05:12.280
<v Speaker 2>from here, not because the story has turned negative, not

0:05:12.320 --> 0:05:14.840
<v Speaker 2>because of the fundamental story, but just they're already priced

0:05:14.880 --> 0:05:17.760
<v Speaker 2>extremely well and they need the world to stay wonderful

0:05:17.800 --> 0:05:20.599
<v Speaker 2>making gains. So I don't expect India to continue being

0:05:20.680 --> 0:05:23.120
<v Speaker 2>outperformers in global stock markets in the second half this year.

0:05:23.720 --> 0:05:26.320
<v Speaker 1>Okay, Mark, does this mean that we just need to

0:05:26.360 --> 0:05:28.239
<v Speaker 1>be more prepared for this sort of thing to happen

0:05:28.240 --> 0:05:28.839
<v Speaker 1>in the future.

0:05:29.200 --> 0:05:33.720
<v Speaker 2>It's a reminder that traders tend to look We all

0:05:33.760 --> 0:05:36.799
<v Speaker 2>do this. We kind of fit narratives to events after

0:05:36.839 --> 0:05:39.920
<v Speaker 2>the fact, and knowing that that it's stories are sometimes

0:05:39.960 --> 0:05:42.280
<v Speaker 2>backfitted to what the price action is. Sometimes it's a

0:05:42.320 --> 0:05:45.040
<v Speaker 2>good idea to be extremely attuned to when there might

0:05:45.080 --> 0:05:47.800
<v Speaker 2>be a catalyst to change the narrative. And that's a

0:05:47.839 --> 0:05:50.760
<v Speaker 2>reminder that going into these catalysts, to look at those fundamentals.

0:05:50.800 --> 0:05:52.840
<v Speaker 2>So if you know, last month you kind of looked

0:05:52.839 --> 0:05:54.560
<v Speaker 2>at like the Mexican carriage trade that's been WONDERU the

0:05:54.600 --> 0:05:56.520
<v Speaker 2>last couple years too gone. Oh, Actually the risk award's

0:05:56.520 --> 0:05:59.359
<v Speaker 2>pretty poor now because implied volatility's gone uploads and you

0:05:59.360 --> 0:06:01.000
<v Speaker 2>would have gone, oh, I better get out of this position.

0:06:01.320 --> 0:06:02.880
<v Speaker 2>It's the same I think with India and had gone

0:06:02.920 --> 0:06:05.520
<v Speaker 2>oh okay. Stocks are priced like one of the most

0:06:05.520 --> 0:06:08.120
<v Speaker 2>expensive in the world. They're priced expensive compared to almost

0:06:08.160 --> 0:06:09.880
<v Speaker 2>over the stock market in the world. They're priced expensive

0:06:09.880 --> 0:06:12.719
<v Speaker 2>compared to their own history. Yeah, it's a wonderful structural story,

0:06:12.720 --> 0:06:14.480
<v Speaker 2>but haven't we priced it enough? And I think that's

0:06:14.480 --> 0:06:18.200
<v Speaker 2>the kind of idea. These bigger news events are prompts

0:06:18.200 --> 0:06:20.760
<v Speaker 2>that before going into them, you should check your fundamentals

0:06:20.920 --> 0:06:21.440
<v Speaker 2>up to date.

0:06:21.880 --> 0:06:24.240
<v Speaker 1>And you should read the Market's Live blog. Mark Codmore,

0:06:24.400 --> 0:06:26.720
<v Speaker 1>our executive editor for Markets Live, thank you very much

0:06:26.760 --> 0:06:29.600
<v Speaker 1>for joining us. For more explanations like this from our

0:06:29.640 --> 0:06:32.800
<v Speaker 1>team of twenty seven hundred journalists and analysts around the world.

0:06:32.960 --> 0:06:35.719
<v Speaker 1>Search for Quick Take on the Bloomberg website or Bloomberg

0:06:35.800 --> 0:06:40.400
<v Speaker 1>Business app. I'm Stephen Carol. This is here's why. I'll

0:06:40.440 --> 0:06:43.000
<v Speaker 1>be back next week with more. Thanks for listening.