- Since before Mexico’s elections, we have been reiterating that 2024 would be a volatile year for Mexican assets. The return of Donald Trump to the White House entails a significant concentration of power. The Republican Party has already secured control of the Senate and will likely do so in the House of Representatives, so in principle the president-elect will have the necessary congressional support to push his policy agenda. Now that the US election is behind us, it is time to assess its potential impact on our asset spectrum.
- Mexico’s challenges under a new Trump administration. President-elect Trump has repeatedly argued for tariffs and, in his first term, imposed tariffs on some Mexican products. Other issues, such as the opioid crisis in the US and immigration from Mexico, could also affect the bilateral relationship, while cutting the US corporate income tax rate could turn Mexico into a less appealing destination for FDI. Overall, there is much more at stake in the US beyond just tariffs. Globalisation will continue, but trade will still be used as a negotiation tool. Mexico might be disqualified in the first stage but will find itself again in this convulsive process for the rest of the world. USMCA has life, but it will be challenged.
- The Trump risk could compound an already complex local context. Mexico’s current situation is not the most constructive. The recently approved judiciary reform, among others, means a deterioration of the institutional framework. In addition, the economy has become sluggish and is at risk of slowing further in 2025. On the bright side, we expect inflation to continue to move towards Banxico’s target, enabling further monetary easing.
- MXN – Mid-term stabilisation but the worst has NOT passed. The MXN initially depreciated amid high volatility after Trump’s victory, but later recovered. Beyond the initial profit-taking, we expect volatility to continue in the near term. We foresee a climb towards levels above 20.50 in the coming weeks (any threat of tariffs would immediately result in a strong sell-off), and in the medium term we would expect a recovery and a stabilisation at around 19.50.
- Rates – Nothing gets in the steepener way. The UST curve registered a strong sell-off after Trump’s victory on expectations for higher inflation. Nonetheless, we expect the FOMC to deliver another 25bp rate cut today, favouring the short end of the curve. As for Mexican rates, we see value in the front end as we expect more cuts from Banxico than are currently priced in local curves. We continue to expect a directional steepener due to a higher MX risk premium and overall we see more value in MBonos vs. TIIEs.
- Corporate credit: No reaction... yet. The US election results do not directly impact the probability of default for Mexican companies in the short term. USD spreads have tightened on higher benchmark rates. However, we expect them to rise again, approaching pre-election levels.
- Global equities: Mixed sectoral impact beyond the positive US boost. US equity indexes soared on the back of the prospect of fiscal stimulus and deregulation in some industries, which would probably result in higher EPS growth. Nonetheless, stock markets outside the US fell as tariff threats to Europe, China, Mexico, and Canada would probably affect trade relations. Overall, the responses of global equities will most likely be mixed and heterogeneous, with some sectors – such as financials and healthcare – outperforming.
- Mexican equities under Trump 2.0, cheap for longer? On almost every measure, Mexican equities are cheap: cheaper than those of many of its peers and vs. historical multiples. And certainly cheaper than the previous time Trump was elected president. Nevertheless, a shock in equity risk premiums (50-100bp) as in 2016 would amount to falls of 5-12% for the Mexican equity market. As in the case of global equities, the impact would vary among different sectors. Financials, Materials, and Food and Beverages could perform better.