This document combines our analytical and strategic views on the macro context in the US and Mexico, with a focus on monetary policy and market analysis. We summarise our main views on fixed income, FX, credit and equity markets for the remainder of 2022, and also discuss the factors that we estimate will drive market trends in the coming months. In our view, these trends continue to justify increased exposure to equities over fixed-income assets, at least during 2Q22.
- Global outlook: flat to inverted curves. While we expect the Fed to keep tightening its monetary policy in line with the FOMC’s estimates, our view on long-term rates remains unchanged, and our medium-term bias is for a less hawkish Fed. An inverted UST curve typically favours fixed-income assets over equities; however, we do not expect this correlation to develop just yet.
- MX economy: positive momentum at the beginning of the year, but asymmetries among sectors remain. We continue to expect GDP growth of c.2.0-2.5% YoY in 2022. In our view, the outlook for consumption supports a full recovery in 2022, which would also be backed by a strong labour market. In terms of sector performance, within services we expect tourism, restaurants and entertainment services in general to grow relatively fast. In addition, the financial sector should benefit from the increase in private employment. Within the industrial sector, continued US growth should support local manufacturing activity. The most underwhelming outlook is for construction, in our view.
- Inflation pressure, USDMXN and the monetary policy rate. We recently updated our YE22 forecasts to 5.6% for headline inflation and to 5.0% for core prices, from 5.0% and 4.7%, respectively. Banxico will most likely maintain its tightening cycle in the remainder of 2022 and we now expect a year-end benchmark rate of c.8.25%. Nonetheless, we think that the scope for a wider spread vs. the US is limited. For the MXN, we still see room for movement towards USDMXN 19.50-19.70 in the short term before a depreciation to around 20.50-21.0 by year-end.
- Sovereign strategy: adding exposure to Cetes and floaters. We remain cautious on nominal rates. We expect the belly of the curve to remain relatively anchored and we still see a case for the curve to remain inverted for longer. Meanwhile, we continue to prefer real rates over nominal ones. We also see room for floaters to outperform. Finally, we have also revised our stance regarding Cetes and now recommend long 1Y positions.
- We remain overweight equities. We have been long Mexican equities vs. other local assets based on the ongoing economic recovery, attractive valuations and Banxico’s tightening cycle. These factors remain intact, and we recently updated our year-end target for the IPC from 57,000pts to 60,500pts. Our top picks are still Cemex (notwithstanding our negative view on construction), AMX, Alpek, Gentera and FEMSA.
- Credit: still positive but reducing our exposure. We are updating our MXN credit portfolios as the components have already experienced some spread tightening. We would rather be invested in FRN bonds rated locally between AA and A, and mapped to an international scale between BBB- and BB. In this sense, we keep PEMEX 24s, LALA 25s, FUNO 25s and VOLARCB 26s in our tactical portfolio. We recently took profits on CFE 25s and added ALSEA 24s. For our tactical portfolio, we expect a total annualised return of 8.0-8.5%.
- Asset allocation. Our portfolio had an annualised return of 8.0% over the last six months. We reduce our overall risk exposure in 2Q22 to include the above-mentioned credit scenario. First, we increase exposure to Bondes D and Cetes from 5% and 6% respectively to 13% each. For Mbonos, we move from neutral to underweight and reduce our portfolio weight from 18% to 12%. We remain neutral on Udibonos vs. other assets and reduce our exposure from 20% to 17%. Finally, while we maintain our overweight on equities and corporate credit, we decrease the weighting of the former to 26% from 28% and the latter to 19% from 23%