Do investors assess the credibility of campaign rhetoric? To answer this question, I develop several alternative arguments for how investors might consider candidates' policy platforms and apply them to Mexico's 2006 presidential race. Statistical analysis of polling trends and the Mexican stock market shows that rising electoral uncertainty lowered market performance, while growing support for either the left-leaning Andrés Manuel López Obrador (PRD) or the marketfriendly Felipe Calderón Hinojosa (PAN) reduced market volatility. These findings reveal that investors discounted López Obrador's left-leaning rhetoric but did not ignore the effect of a tight race on the value of their assets.
Keywords: stock markets; public opinion; presidential campaigns; Mexico
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After nearly two decades of progress on market reforms, Mexico's 2006 presidential race raised questions about the country's future economic policy trajectory. The leading contenders, Felipe Calderón Hinojosa of the right-leaning Partido Acción Nacional (PAN) and Andrés Manuel López Obrador of the leftleaning Partido de la Revolución Democrática (PRD), clashed over the best way to achieve long-term economic growth. Whereas Calderón pledged to continue the neoliberal economic policies of outgoing President Vicente Fox (PAN), López Obrador proposed to increase state involvement in the economy to generate jobs and growth.
This was not the first time that position-taking during a Mexican election was couched in terms of preferences toward the neoliberal economic model. In 1988, Cuauhtémoc Cárdenas, founder of the PRD, challenged the then hegemonic Partido Revolucionario Institucional (PRI) and its candidate Carlos Saunas Gortari on similar grounds. Yet, two things distinguish 2006 from prior years. First, there was a strong possibility that the PRD could win. Second, López Obrador's anti-neoliberal economic policy rhetoric came in a context of a recent leftward policy shift in several Latin American countries, and this raised concerns that he would act on his promises if elected. Venezuela's Hugo Chávez (Movimiento Quinto República) radically increased state presence in the economy after coming to power in 1998, as did Argentina's Néstor Kirchner (Partido Justicialista) after 2003. Bolivia's Evo Morales (Movimiento al Socialisme) followed a similar interventionist strategy after his January 2006 inauguration.
Mexico's economic policy debate combined with Latin America's leftward policy shift to raise the profile of its presidential race among investors. López Obrador's anti-neoliberal economic rhetoric and his popularity should have frightened investors nervous about radical policy changes. Yet, for every Kirchner, Chávez, and Morales, there has been a Lula, Vazquez, and Bachelet. Brazil's Luiz Inacio "Lula" da Silva (Partido dos Trabalhadores) and Uruguay's Tabaré Vazquez (Partido Socialista) maintained the market-friendly policies of prior administrations, while Chilean Michelle Bachelet's Partido Socialista has long accepted the neoliberal economic approach. In such a context, López Obrador might have been likened to a Lula rather than a Chávez, thus reducing investor concern.
In this article, I examine Mexico's 2006 presidential race and investor attitudes toward the candidates' policy promises and their chances of winning. Specifically, I pose two questions. First, were investors concerned about a leftward policy shift in the case of a López Obrador victory? Second, did beliefs about López Obrador affect investment strategies and financial markets during the race? To answer these questions, I develop a series of arguments about how investors should respond to shifts in the candidates' chances of victory under different views about the risks associated with a López Obrador win. This study draws from theoretically driven scholarly research, as well as practical analyses conducted by investment banks and market research firms to develop the alternative arguments, in contrast to most prior analyses of the effect of politics on markets. …