World's Best Stock Rally in Peril as Peru Politics Sink Sol

  • Mendoza's surge in polls spurs selloff in Peruvian assets
  • Bank of America says very likely she advances to second round

Peru’s presidential politics are threatening to undermine a rally that fueled the world’s biggest stock gains and pushed up the value of bonds and the sol.

Concern is growing Peru may be headed for a less investor-friendly government after Veronika Mendoza, a congresswoman who favors scrapping inflation targets, raising the minimum wage and toughening environmental laws, moved into a statistical tie for second place before an April 10 election. Her popularity has grown over the past month amid political turmoil that included two candidates getting barred from running and accusations that the leading contenders attempted to buy votes with food, beer and money.

The shift comes after a recovery in commodity prices and improving sentiment toward emerging markets pushed Peru’s benchmark stock index up 21 percent this year, the most among more than 90 indexes worldwide tracked by Bloomberg. Peruvian equities slumped Friday and the currency weakened the most in two years as investors weighed the risk that Mendoza will win in a second round of elections after campaigning to unwind free-trade accords, rewrite the constitution and increase spending on social-welfare programs.

“Mendoza is doing very well in polls, and it’s a very likely scenario that she advances to the second round,” said Francisco Rodriguez, the chief Andean economist at Bank of America Corp. in New York, which has an underweight recommendation on the country’s debt. "This is going to be very negative for bonds."

Mendoza still has less than half the support of frontrunner Keiko Fujimori, who is promising to battle high crime rates and spur growth through infrastructure development and tax breaks, and is virtually tied with Pedro Pablo Kuczynski, an ex-finance minister and cabinet chief. If no candidate gets more than 50 percent support in the first-round election, the top two will meet in a runoff in June.

A runoff between Fujimori and Mendoza is becoming increasingly likely, Andres Soto, a strategist at Banco Santander SA in New York, said in a note. The country’s benchmark stock index slipped 0.3 percent Monday as of 9:37 a.m. in New York.

The S&P/BVL Peru General Index’s gains this year come after it was among the world’s worst performers last year, plunging 33 percent amid a selloff in the mining companies that dominate the equity gauge and concerns that the country would be downgraded to “frontier” status by MSCI Inc. This year, with gold up 15 percent and copper prices higher after three years of declines, the iShares MSCI All Peru Capped ETF has rallied 29 percent, making it the best-performing single country fund among 196 ETF’s tracked by Bloomberg. Just last month, it had the biggest inflow since September 2014.

Zinc miner Volcan Cia Minera SAA alone has more than doubled this year, and eight companies on the country’s benchmark stock index are up at least 40 percent. Peru is the world’s third-biggest producer of copper and zinc.

The cost of protecting Peruvian bonds against nonpayment using five-year credit-default swaps has tumbled 13 percent this year, while the sol is up 2.2 percent. The country’s dollar-denominated notes have returned 8 percent.

A poll by Datum Internacional released last week showed Fujimori leading with 36 percent of the vote, with Kuczynski at 16 percent and Mendoza, who left the ruling Gana Peru alliance in 2012 after a government clampdown on anti-mining protests, at 15 percent. Datum polled 1,511 people nationwide from March 28 to 30 and the margin of error was plus or minus 2.5 percentage points. The incumbent, Ollanta Humala, can’t run because of term limits.

“Mendoza’s rise means that an anti-market candidate can be elected president,” said Sebastian Cruz, an analyst at Kallpa Securities in Lima. “All this noise keeps away investors and causes capital outflows.”

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