International financial markets are sensible and behave accordingly to changes in government ideologies. Statements made by Trump and newly elected presidents in Latin America have created shocks in the international financial markets. In this regard credit rating agencies have already made their forethoughts. Seemly, there is a tendency favoring right-wing governments over left-wing ones. By the end of 2018 two of the biggest Latin American economies elected new presidents from opposite political ideologies. Markets talked: they championed the right-wing president over the left-wing one.

Mexico and Brazil, two different trends

Jair Bolsonaro, the newly elected President of Brazil and Andres Manuel Lopez Obrador (AMLO), the new president of Mexico, came into office after a wave of public inconformity of regime from their respective antecessors in power. Both regimes allowed the enrichment and the concentration of resources of the wealthiest deciles. Poverty, insecurity, and social weariness in both countries resulted in a general demand for a radical change. The newly arrived presidents improved the social perspectives boosting economic confidence and the approval of both regimes.

But as both presidents began to take actions there was a change in perspective. They are taking actions without a political counter weight rejecting previous mature public policies and implementing new ones without a proper previous assessment. There has also been a peak of change in currency flow; Brazil with its highest moments with incoming currency and Mexico with outflow of it. The financial markets preferred a conservative right-wing whose priority is privatizing over a government betting for wealth redistribution and social welfare.

Financial markets and welfare

Financial markets are always looking for the best investment yields and they sort markets under this principle. Given the international financial market volatility, investors pay closer attention to credit and asset markets in developing countries looking for less fluctuating markets.

Until June 2018, Mexico was ranked as the seventh more suitable financial market in developing economies due to its financial stability and rate of return. Accordingly to the Institute of International Finance (IIF) from November 2018 to January 2019 there was a total outflow of 6,600 million dollars. This currency flow increased the demand for hedge funding and certificates increasing the overall volatility. The market signaling is clear, they have assessed that the newly elected government in Mexico doesn’t reflect a stable economic policy.

On the other hand Brazil has become the developing country receiving the highest influx of capital. This has to do with the policies announced during the presidential campaign and the first days in office. Bolsonaro has pronounced himself in favor of a liberal economic policy supporting state firms privatization and limiting governmental intervention in the market. He has also promised to reduce the waiting time to create a new firm, indicator highly priced by foreign investors.

What’s about growth?

In the short run this shift in the financial markets represent a change in markets and consumers expectations. This shift does account for a change in wealth provisions of the wealthiest 1%, as Piketty present in his book the Capital in the XX1 century. They have a stock of capital from which they receive most of their income in contrast to other sectors of the society that rely more on their work income. The stock-tenants are the most aware of changes in market expectations and economic policy forecasts.

Nevertheless, developing countries like Mexico and Brazil are highly dependant of the change in market expectations. The influx of foreign direct investment (FDI) is highly dependant of macroeconomic stability that relies on market expectations.

Although the market may determine the amount of influx of FDI in Mexico and Brazil there is no clear evidence of the role of FDI in economic growth. For example, in a recent study evidence shows that national private investment is the main driver of economic growth in Mexico. If the government is dependant of the influx of FDI and as long as they don’t impose a capital control, as China did, there will be no possible synergies between national investment and FDI. This lack of productive chained investments reduces the possibility of robust economic growth.

Financial markets will keep changing for every policy and macroeconomic turn in Mexico and Brazil. As long as these economies keep accounting foreign capital as the main economic growth driver their national economies will be at stake of volatile international financial markets.

Conclusions

In contrast with the efficient market hypothesis in these cases prices reflect past information and public information is in hands of a few privileged ones. Also, this information is taken in a contrasting way. Both economies open investment opportunities one for bull and the other for bear markets. Right-wing policies give confidence to the market in the medium-long term and left-wing policies increase uncertainties. This short-term volatility opens the opportunity for betting and winning in a fluctuating market.

As Paul Krugman tweeted “The stock market is not the economy”. The new presidents in office have a learning opportunity as they begin their mandate. This first year in office will be crucial for both countries. AMLO should demonstrate that his social priorities are not in conflict with macroeconomic stability. Bolsonaro will have to keep the promises he has already made to the markets. Both should rethink their almost blind trust on foreign capital as the main economic growth driver. Otherwise, the meager economic growth will continue to be at stake of mercurial reactions of the market.

Authors: Karla Barcellos & Lilia Garcia Manrique

Article originally published in Spanish in Foreign Affairs Latinoamerica