- We have been long MBonos and Udibonos; neutral on MX credit, short on the MXN, underweighting equity, overweighting USD bonds, USTs and UMSs since 1Q24.
- After the federal elections in Mexico, several global risk factors have materialised and modified the balance of risks for several EM markets, including Mexico: from idiosyncratic triggers - the unfriendly market reforms in Mexico that will be discussed by Congress this September, as well as the political and economic headlines broadly at play in LatAm markets - to escalating US campaign narratives, the market reading of a US economic slowdown, the Federal Reserve cut in September, and the radical monetary policy shift in Japan.
- In short, some EMs have transitioned to another market state, from one where low global volatility ruled, to one where high volatility is the new name of the game. Whether it is a wavering Fed and evidence of a likely US economic slowdown, or local headlines and geopolitical risks such as events in Europe and the US elections, all these factors have implications for the world as a whole. In the case of some economies, economic growth has disappointed at a time when inflation has not yet receded. Central banks need to keep adjusting real rates to lower levels give the global risks. In sum, when thinking and analysing EMs such as Mexico, we must acknowledge markets have entered a different state. Based on this reality, in this note we will outline our main views and strategies ahead of the autumn.
- We continue recommending being long MBonos and TIIEs, overweighting specifically the 3-7Y tenors, as well as Udibonos (long end). We are neutral on credit spreads and prefer bonds with high coupon levels or those priced significantly below face value to benefit from the anticipated rate cuts. We continue underweighting equity and ranking several industries high, such as consumer staples, financials and real estate for their quality and duration attributes.
- We continue recommending being short the MXN (we expect the USDMXN to reach 20.0 before ending the year at 19.0). We are overweighting UMS yields. In addition, on USD bonds, we will remain invested in cyclicals up to 2026 before becoming more cautious in cyclical corporates and increase positions in high-quality names (IG) in sectors with low cyclical fundamentals.