Investors' reactions to elections in emerging markets are often binary. If a left wing candidate, or one perceived as anti-market, wins, bond and equity investors see it as bad for the economy. That can show up in a sell-off straightaway, or in more caution and pessimism about the country.
The first mitigant investors hope for is that the new leader will not be able to implement the more radical parts of what he or she offered the electorate when campaigning. In the real hurly-burly of politics, the firebrand will have to compromise.
Often, the analysis investors busy themselves with is less about whether a new government's policies are any good, than about whether they have any chance of becoming law.
In the case of Mexico's new president-elect Claudia Sheinbaum, who hails from the same socialist party, Morena, as the outgoing president Andrés Manuel López Obrador, known as Amlo, her victory had been all but assured for weeks.
What the markets did not know until the final result on Sunday was that it would be a crushing victory — Sheinbaum's 59% of the vote came with a two thirds majority for the Morena-led coalition in the Chamber of Deputies and likely qualified majority in the Senate.
There is no chance, then, for investors to console themselves — as they have done after left or unconventional candidates won the presidency in Brazil, Colombia, Peru and Chile in recent years — with hopes that the president will be hamstrung.
Selling off
Monday brought modest falls in Mexican assets, with Mexico's credit default swaps widening 8bp, while other Latin American governments were flat or tighter, according to Lucror Analytics. The peso has fallen 5% against the dollar.
EM bond investors have been bombarded with invitations from investment banks to conference calls with analysts, which have consisted almost entirely, one told GlobalCapital, of the banks wringing their hands in worry that Sheinbaum will now have free rein to make Amlo's whole agenda a reality.
Some of Morena's proposals, particularly constitutional amendments and legal reforms that appear to weaken Mexico's vaunted institutional stability and independence, do indeed look concerning.
But it would be a mistake to caricature Sheinbaum as Amlo's puppet.
Latin America's recent electoral history is peppered — on both sides of the political spectrum — with examples of anointed successors using the previous leader's influence to get elected, only to then exercise moderation as the realities of governing become clear.
Take the ominously named Lenín Moreno, who followed Rafael Correa in Ecuador, or, on the right, Juan Manuel Santos, who succeeded Alvaro Uribe in Colombia.
Sheinbaum is clearly aware of the importance of keeping international financial markets onside. She has intervened vocally to reassure investors about the need for fiscal responsibility.
This, by the way, is something Amlo also insisted on for most of his presidency, meaning the Mexican peso is now worth 14% more in dollars than when he took office.
Like all politicians, Sheinbaum will need economic growth to retain her popularity. She knows Mexico has a unique opportunity to take advantage of the nearshoring trend. To do so, it cannot afford to scare off international investment. This alone should assuage fears about the next president doing anything too radical.
Moreover, everything about Sheinbaum — who is making history as Mexico's first woman president — suggests she has firm convictions of her own, is an experienced and shrewd politician, and will want to implement her own ideas and leave her own legacy, not copy her predecessor.
Sheinbaum is known as more of a pragmatist than the dogmatic and extremely ideological Amlo. This may lead to her to grant some tactical concessions to the former president to ensure she keeps his backing, but it could also mean she understands where Mexico needs to encourage private investment — to meet energy or environmental goals, for example.
This is not to say investors have nothing to worry about, nor that all the new government's decisions will please financial markets.
But investors should look beyond lazy assumptions and not write Sheinbaum off as just another leftist. If anything, a more balanced and diplomatic figure at the head of the country, after the rash, hot-headed and often illogical Amlo rhetoric, may be a boon.