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