Investors Anticipate Narrow Keiko Win

Investors and economists say they are anticipating a narrow win by Keiko Fujimori over Ollanta Humala ahead of Peru’s presidential election Sunday. Shares of Peruvian companies traded in the US did well Thursday on the strength of private polling suggesting Fujimori’s lead was widening, but investors warn that political risk continues on the possibility that Humala might contest election results if the margin of victory is within a few percentage points. “Humala already said that he thinks there was some vote rigging involved in the first round, so he does seem to be setting the market up for a challenge,” says David Spegel, head of EM strategy at ING. “If there’s only a 2% margin [of victory for Fujimori], that increases the likelihood that he’s going to demand a recount. If Fujimori wins by a 5%, or even more than a 3%, than the chances of a recount going in favor of Humala are that much reduced.” Peru’s 5-year CDS is trading at around 143bp, down from an intraday high of 177bp on April 26, suggesting that the market is pricing in a slightly greater probability of an Humala win, Spegel says, despite the polling. Eduardo Suarez, senior emerging market strategist at RBC, says that pricing is fair since there is a greater potential downside to an Humala victory than there is upside to a Fujimori victory. “On CDS, if Keiko wins it probably goes back to 110bp or so,” Suarez says. A win by Humala, on the other hand, could cause the 5-year to widen out to close to 200bp, he says. “If she wins and the vote is uncontested and there’s a margin of 4%-5%, clearly it will be a complete relief rally down to pre-election levels, almost instantaneous,” says Siobhan Morden, head of LatAm strategy at RBS. “The problem is, any relief rally would be interrupted if there were social unrest, or if it [the election] is contested or there is uncertainty on the final outcome.” The combination of uncertainty going into the weekend combined with the stark contrast in potential outcomes has