Traders Stunned by Election Surprises From Mexico to India

(Bloomberg) -- Early Monday morning, one of the world’s most profitable currency trades unraveled, done in by a twist in Mexican elections few saw coming. Twenty hours later, investors in India started frantically dumping stocks, triggering a one-day, $386 billion wipeout, when they realized they had badly miscalculated the scope of Narendra Modi’s election victory.

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Around the world, surprise results in some of the biggest developing countries are illustrating how much markets have riding on the politics of 2024 — and the pitfalls of trusting opinion polls to predict the outcome.

From Mumbai to Mexico City, the Year of the Election — in which 40 countries are holding national votes — is already burning investors, providing an early warning as elections in the European Union and UK near, and five months ahead of the US presidential contest. Often, forecasts are accurately predicting top-line results, such as Claudia Sheinbaum’s landslide win to become Mexico’s first female president, while failing to pick up on more nuanced outcomes, like how many seats Modi’s party would carry in parliament.

The risks continued to play out Thursday afternoon when the Mexican peso plummeted as much as 2.7% before trimming some losses. The abrupt fall came after a leader in Sheinbaum’s Morena party said lawmakers would seek to pass several reforms once the new congress is seated. Those measures have long been feared by investors.

Problems with polling are not new, of course, and they notoriously failed to catch the mood of voters ahead of Brexit or Donald Trump’s victory eight years ago. But the stakes have only increased since as an era of deep-seated populism takes hold and rising nationalism is blurring the lines between politics and markets.

“It’s great to know base cases and what’s baked into the market but what’s really very important is to pay attention to tail risk, the outside risks, and how those possibilities will play out,” said Lindsay Newman, head of Eurasia Group’s global macro-geopolitics practice in London. “We’ll see more of that in elections ahead in the US and UK.”

On Thursday, roughly 373 million citizens across the European Union will choose members of the European Parliament in a decision spanning 27 countries that will help to shape policy on trade, regulation and climate. It’s seen as a test of whether far right parties are gaining clout, making it a gauge of the political winds.

Meanwhile, polls in the UK’s July 4 election are suggesting a win for the opposition Labour Party — a possibility investors have had the better part of two years to price for — but there’s wide estimates for the size of its expected victory. Most speculation has focused on the scale of Keir Starmer’s likely win, which could eclipse Tony Blair’s more than a quarter century ago.

Such a landslide could reinforce a push for progressive policies, such as overhauling the tax regime to more evenly distribute wealth. Investors see odds Labour will renege on its promise not to raise income or corporation taxes, according to a survey of Nomura Holdings Inc. clients released on Wednesday.

As the vote approaches, the British pound has been gaining against its peers, hitting its strongest level against the dollar in nearly three months.

In the US — with a neck-and-neck rematch shaping up so far between President Joe Biden and Trump — traders have started bracing for heightened volatility, given Trump’s return could escalate a trade war, rattle the bond market and drag down other currencies.

Some stock pickers are already loading up on the shares of US companies poised to thrive under Trump and shorting those that would lose out, such as renewable energy companies, said Mauricio Jose Moura, founder and partner at Gauss Zaftra. The Cayman Islands-based fund that manages $20 million in assets specializes in making bets based on elections.

“Polls are not a prediction, they’re a snapshot,” he said. “If you treat polls as a prediction, you’re going to get it wrong.”

‘Throwing a Dart’

In all, voters in countries representing roughly 40% of the world’s population and its gross domestic product will have elected new leaders before the year is out. So far, pollsters have had in inauspicious string of calls, leading to financial meltdowns.

“Polls are about as useful at predicting election outcomes as throwing a dart,” said Carmen Altenkirch, an analyst at Aviva Investors Global Services in London. “Post Covid, electorates are less impressed by empty promises and poor policy making, which has aggravated inflation in some countries.”

In the run up to Sunday’s vote in Mexico, analysts correctly predicted Sheinbaum would take the presidency but underestimated the chance that her Morena party would win a supermajority in congress. When that nearly happened — the party fell just a few seats short in the senate — markets tanked.

The peso, which had been the world’s best-performing major currency until late May, plummeted 5% over two days of trading. The spike in volatility derailed the appeal of using the peso in the carry trade, in which investors borrow in countries with low-interest rates and invest in those where rates are higher.

In India, exit polls drastically overestimated the size of victory for Modi’s Bharatiya Janata Party. When the votes rolled in and it became clear his party lost its majority in parliament, the stock market sank, sending the NSE Nifty 50 Index down nearly 6% in its worst day in more than four years.

“This is a reminder that markets struggle to price the nuance of political risk,” said Paul Donovan, chief economist of UBS Global Wealth Management, “and that the apparent conviction of opinion polls is to be treated with caution.”

It capped off a wild week of elections that began when South Africans cast their ballots. There, money managers had positioned for the ruling African National Congress to wind up with enough support to comfortably govern in a coalition with a smaller party.

It turned out to be much more complicated, leaving the ANC exploring the creation of one forged from a broader range of parties, dragging down its currency.

For Nick Rohatyn, a money manager who specializes in emerging markets, the votes showed how quickly an investor can be punished for betting too heavily on an outcome.

“One should be thinking in the medium term, about policies and flows of capital,” said Rohatyn, founder and CEO of The Rohatyn Group. “Any time they load up radically or unload radically ahead of an election, they’re making a mistake.”

--With assistance from Maya Averbuch, Maria Elena Vizcaino, Colleen Goko, Naomi Tajitsu and Brendan Scott.

(Updates with peso move in fourth paragraph.)

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