Global markets have performed strongly in 2025 despite the tariff shocks, distorted correlations, and shifting macro narratives. The US economy has slowed but has managed to avoid a recession and while inflation has fallen, some persistent pressures remain. Meanwhile, asset valuations have become increasingly expensive across different asset classes, particularly in US equities while the USD underperformed. Looking ahead, 2026 is unlikely to see any significant shifts in macroeconomic dynamics. In this note, we provide analytical concepts behind our strategy building for the coming year as well as the landscape for Mexican markets.
- On the global front, we see three key factors that could shape market dynamics. A potential tech-driven market correction remains a central risk. Meanwhile, while markets have shrugged off tariffs, their impact may not have completely materialised. Finally, as uncertainty remains, the Fed faces a policy dilemma: a cooling labour market together with sticky inflation. We expect further gradual easing in 2026, although the risk of lower-than-expected rates is not negligible, in our view.
- Mexico emerged as a surprising beneficiary of US protectionism in 2025, maintaining less tariff exposure than its peers and boosting exports, which became the economy’s main growth engine. However, domestic growth remains fragile as investment is weak, services are stagnant, industrial production contracted in 3Q25 and job creation is not enough as to boost consumption. We expect Mexico’s GDP to grow c.1% in 2026.
- Inflation is expected to briefly rise above 4% in 1Q26 due to tax changes, but should then moderate to a year-end level of 3.8%. With stable inflation and a stagnant economy, Banco de México will have the scope to cut the policy rate further, particularly as real rates remain above neutral. Nonetheless, the Central Bank is near the end of its easing cycle, as it will reach a terminal rate of around 6.5% in 2026.
- Despite the positive performance of the MXN this year, we are maintaining our negative bias for 2026 and once again recommend hedging around the USDMXN18.0-18.30 range. We anticipate a gradual depreciation towards 19.20 by YE26, as we expect volatility to pick up from the current lows. We recommend taking advantage of the low implied volatility and hedging MXN risk in 1H26.
- We are overweighting sovereign fixed income assets. In our view, duration in MBonos is still attractive, notably in the 10Y–20Y sectors, given the still-elevated yields and room for curve compression. We prefer MBonos over TIIEs, as once Banxico enters the final easing phase, the latter are more likely to underperform. We also see value in real rates. Udibonos offer a compelling carry, particularly at the short end, supported by accumulated inflation and favourable risk-adjusted returns. We are underweight both Cetes and Bondes.
- Our outlook for Mexican equities remains neutral. Valuations are no longer cheap, domestic fundamentals are weak, and we think that the rally in 2025 was largely driven by global sentiment. Our YE26e target price for the IPC is 69,200pts, representing 9.2% of potential upside from current levels, plus an estimated dividend yield of around 4%. We expect industrials to be the fastest-growing sector, followed by staples and financials. In contrast, we anticipate a more challenging outlook for materials after a couple of stellar years.
- We are overweighting local credit as it continues to be a function of local rates and limited supply. As usual, the spreads vs. sovereigns have narrowed, but given strong demand, a decompression looks unlikely.
- Finally, within our USD assets under coverage, we still favour MX USD corporate credit, while maintaining a defensive stance in SIC global equities. We are neutral on Mexican sovereign debt.