June 5, 2011 / 9:50 PM / 8 years ago

Instant View: Peruvian markets to sell off if Humala confirmed

NEW YORK (Reuters) - Left-wing former army commander Ollanta Humala is leading the race to become Peru’s next president, exit polls showed on Sunday.

The results, if confirmed, will most likely trigger a sell-off in Peruvian markets on Monday, as many investors were betting on a victory of right-wing lawmaker Keiko Fujimori, considered more market-friendly.

Following are comments from analysts and investors:

MARKETS, MIAMI

“It is bearish. It is not positive news. The problem with Humala is that even though he has changed his tone, to me it is very clear he does not believe in the model that Peru has successfully implemented for the past 15 years. It is a model that has allowed Peru to better its social indicators.

“There is really no reason for an investor to be hopeful. My sense is that the market, investors and the like will be on the defensive. That kind of uncertainty is going to take a toll on the economy. I think Peru is going to lose at least a couple of quarters of investment.

“I cannot read the guy. There are four economic programs. One with nationalizing the mining industry and another that sounds like free-market economist Milton Friedman. That uncertainty will have a negative effect on the economy and the markets.

“I’m not sure how aggressive he will turn out to be, but if he decides to make a change according to his beliefs, he is going to step on toes. He is not going to be another Alan Garcia. If he wins, then I think it is bad news for the Peruvian markets.”

STRATEGIST, NOMURA SECURITIES, NEW YORK

“On Monday I think the markets are going to be very volatile, but not in the exchange rate because the central bank has a lot of firepower and can smooth things out. But CDS are going to react pretty fast. It was around 140-145 (basis points) in the last week. I think we could go quickly to 180, perhaps not tomorrow or the next day, but in coming days.

“I think we are going to see a sell-off in equities and domestic debt. However, on external debt it is a little different because 85 percent of it is owned by foreigners, and my perception is that they will give him more benefit of the doubt.

“Once Humala starts to appoint moderate people in the cabinet, I think we see a correction overall to a level pretty close to where they were pre-election. I expect to see Kurt Burneo at the Finance Ministry and at the central bank, Oscar Dancourt. These kinds of appointments, in the sense of moderate policymakers, will calm the market.”

CAROLA SANDY, STRATEGIST AT CREDIT SUISSE, NEW YORK

“I think the market reaction tomorrow will be negative. How negative will depend on what happens tonight.

“First, we have to see whether Keiko is going to concede or not; if the election results will be clean. It also depends on what Humala says in his speech. I expect he will say his government is going to be moderate.

“We also have the finance minister talking to Reuters and saying the government has a contingency plan.

“So people are going to wait for Humala’s appointments to the cabinet. It may take a few days or weeks for investors to regain confidence in Peru. But in the meantime if the message tonight is of moderation, then we can have a sell-off — but not a very large one — tomorrow.”

DONALD ELEFSON, PORTFOLIO MANAGER AT HARDING LOEVNER FUNDS,

A FRONTIER-MARKET FUND WITH $210 MILLION UNDER MANAGEMENT AND

ABOUT 3 PERCENT OF ITS PORTFOLIO IN PERUVIAN ASSETS

“It’s a surprise. Sentiment was definitely that Humala was not going to win. You saw a very strong market this week. This comes as a big surprise.

“I have not done the analysis to see just how important this exit poll is, what the correlation is between that and a successful outcome, but investors are very surprised.

“The level of concern and risk will go up; you will see more selling than buying. There was a lot of very strong buying in the market in the past week. People thought it was over-discounted, people thought the election results would not be bad. This is the type of news that is going to cause people, those who were speculating, to turn around. We didn’t speculate, we are long-term investors.”

JEFF GRILLS, CO-HEAD OF EMERGING MARKET DEBT PORTFOLIOS AT

GRAMERCY FUND IN GREENWICH, CONNECTICUT

“My guess is the markets are going to take a cautious reaction and bond prices are likely to be lower. I wouldn’t think it would be a panic, but my guess is you will see some level of weakening that is more than just a minor sell-off.

“He’s said he’s more moderate now, closer to a Lula-like candidate, but people will have to see evidence of this before they can fully embrace that ideology.”

FELIPE HERNANDEZ, STRATEGIST AT RBS SECURITIES IN STAMFORD,

CONNECTICUT

“In the short term, once these results are confirmed, the market is likely to take it quite negatively. The currency can easily weaken to the levels it was trading when Humala won the first round of the elections.

“In the short term, it’s very likely that we’ll have an overshoot in the markets, but probably at a certain level it will become attractive for investors again and people should start buying on the possibility of Humala not being as bad as markets fear.

“A coalition with (former president Alexandre) Toledo would limit room for him to move forward with the most radical ideas of his plan.

“The overall market will be watching very closely what he says and what he does. And it’s very likely that he will try to reassure the market if he sees a sell-off.”

IN TORONTO

“I would expect a negative reaction from the market from this result. People are somewhat mixed on how drastic the change in policy will be. He has been trying to moderate himself so I would imagine a negative reaction to Peruvian assets in the near term and then people will assess how true his moderation has been.

“Initially it won’t have an impact (on the creation of the MILA, the new bourse which integrates the stock exchanges of Colombia, Chile and Peru). They will have to see what Humala does once he takes power. I imagine things will proceed as planned.

“This news is negative for bonds, it will put upward pressure on spreads.”

Reporting by Manuela Badawy, Daniel Bases and Walter Brandimarte

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