Equity Strategy: Santos Re-Election Best-Case Scenario For Markets

We remain neutral towards Colombia's IGBC benchmark equity index amid a high likelihood of market turbulence in the run-up to and immediate aftermath of the May 25 presidential election. We believe the re-election of President Juan Manuel Santos is the most likely scenario and the most positive for investor sentiment towards Colombian assets, as it ensures policy continuity, especially regarding the ongoing peace negotiations between the government and the left-wing insurgent group Fuerzas Armadas Revolucionarias de Colombia (Farc) ( see 'Domestic Politics Crib Sheet', May 5).

However, a first-round victory, which requires more than 50% of the vote, is highly unlikely, and we expect a tight second round between Santos and the candidate from the Centro Democrático coalition, former finance minister Óscar Iván Zuluaga. The second-round vote would take place on June 15, and speculation over a potential win by Zuluaga, who opposes negotiations with Farc, implies Colombian equities will see high levels of volatility, at least until the election process is over. A victory by Zuluaga would likely trigger a deterioration in sentiment towards energy companies Ecopetrol and Pacific Rubiales (which together account for 25.2% of the IGBC index) given the potential for greater attacks on energy infrastructure by Farc if peace negotiations are abandoned. That said, other sectors that we like, such as materials and consumer sectors, will remain relatively unaffected by the result of the election, and we maintain a positive multi-month outlook towards those areas of the economy owing to their strong fundamentals.

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Colombia - IGBC Benchmark Equity Index

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Related sectors of this article: Economy, Finance, Equities
Geography: Colombia

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