2024/12/03

MX Asset Allocation – Economic views and strategies for Mexico

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In this document, we present our Mexican Asset Allocation strategy, which combines our analytical and strategic views of the global and local context. Herein, we summarise our main views on fixed income, FX, credit and equity markets, and their respective drivers for 2025.

  • US perspectives. In line with our 2024 view, the Fed has already cut rates by 75bp; inflation fell further and the cycle decelerated mildly. We think that softer data with continuous inflation moderation will give the FOMC leeway to ease rates further at the beginning of 2025. However, the medium- and long-term outlook for the US economy and rates is more complicated. Although the large US deficit has not raised major concerns, fiscal policy could regain prominence. In our view, Trump’s fiscal proposals – if and when implemented – could temporarily boost US GDP growth above its long-term average, but will cause inflationary price distortions and increase imported goods prices if tariffs are implemented. Ultimately, this could limit the Fed’s leeway in the medium-to-long term. Hence, curves can steepen even further.
  • Mexico: A complex growth outlook. For 2025, we expect the Mexican economy to grow below its potential level once again. While minimum wage hikes could continue to bolster private consumption and expectations related to near-shoring might favour industrial production, challenges persist. The fiscal consolidation plan considered in the 2025 Budget Proposal, coupled with Banxico’s restrictive monetary policy stance, may hinder overall growth. Meanwhile, Mexico’s legal environment might also affect GDP, while US President-elect Donald Trump’s Mexico-related proposals would certainly represent additional risks. We remain optimistic about inflation as we expect the headline index to moderate to 3.5%. As such, the combination of low growth and inflation convergence to Banco de México’s target favours the continuation of an easing monetary policy cycle in 2025 to levels between 7.5-8.0% by year-end.
  • MXN: Wide ranges amid policy uncertainties. The scenario for 2025 remains a complex one, characterised by high uncertainty. In our view, carry would no longer be the main anchor of the MXN. Furthermore, Trump’s proposed tariffs on Mexican exports, if and when they materialise, would weigh negatively on the MXN. We remain cautious towards the MXN as we expect FX markets to be highly volatile into the beginning of 2025 on the potential for a trade war. Nonetheless, according to our models, the MXN is currently undervalued vs. the USD and we expect it to stabilise around 19.50-19.80 in 2H25.
  • Nominal rates: Keeping up with the directional steepenings. We keep our overweight stances towards nominal curves and see more value in the 2-5Y section due to our monetary policy view. Meanwhile, we remain cautious of the belly and long end of the curve as we continue to see scope for higher Mexican risk premiums. Hence, we maintain our directional steepeners. From a relative value perspective, we see value in MBonos over TIIEs as the swap curve reflects a more dovish scenario compared to MBonos, and since issuance in the latter will be lower. In Udibonos we see value in the long end of the curve, as real rates are attractive and structural demand should continue even with lower inflation. Lastly, we are shifting to a more neutral stance in UMS as the scope for an MXN depreciation and USD rates will be more limited.
  • Corporate credit: Remain constructive MX credit (IG) on the back of lower rates. Credit tends to outperform in Mexico due to supply/demand dynamics, which should be able to continue in 2025, in our view. In USD, in the oil & gas sector we continue to like Pemex in the short section of the curve. In the chemical sector, it seems that cash margins are recovering from a trough, but still have a way to go, whereas in consumer discretionary we note that average spreads for LatAm investment grade (IG) corporate bonds have shown a more significant compression. In MXN credit, we continue to focus our MXN credit strategy on investment-grade (IG) issuers with low default risk, particularly those with local AAA–AA ratings.
  • A new set of risks warrants remaining cautious. Amid a new set of risks for 2025-26, we are upgrading our view on Mexican equities to neutral from underweight with a target price for the IPC at 55,850pts for YE25e. On the plus side, valuation is indisputably cheap compared to peers and the MexBol’s own history, not to mention that it is 35% below the levels prior to Donald Trump’s first mandate. Furthermore, despite a weaker macro backdrop in Mexico, companies’ earnings prospects are reasonably good. On the less positive side, the asymmetry of market risks in addition to policy uncertainty are among the factors that prevent us from adopting a more positive stance.
  • Global equities – can US indexes continue to beat all other assets? In our 2024 Asset Allocation we recommended US equities over Mexico’s because even though the former seemed more expensive, the US cycle looked to be in a better shape, and in MXN terms the return would be much higher. Since we are now more neutral towards the currency, we prefer to be selective on different sectors in 2025, particularly considering the potential impact of Donald Trump’s policies. In our SIC positioning, as per our clustering, we focus on financials, industrials, oil and gas, and technology.
  • Asset allocation. The scenario for 2025 is one in which fixed-income assets have scope to outperform other assets in Mexico. From a global perspective, the case is not that clear. US equities might have room to rally further as investors expect a fiscal boost in some sectors, but valuations are stretched. Meanwhile, inflation concerns might limit any rally in US rates, so we are decreasing our exposure to USD assets overall. Within local rates, MXN credit tends to outperform sovereign rates because of credit risk and thin liquidity in this market. While we expect this to happen, due to low liquidity we prefer sovereign rates. Lastly, while we recently upgraded our stance towards equities, we will not increase our exposure significantly due to lingering risks in 2025.

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