- In 2024, general elections will take place in Mexico in June and in the US in November. The combination of these political events, in our view, will drive local assets and add volatility throughout the 2Q24 and 3Q24.
- The Fed’s input as part of the framework: In previous elections, while volatility increased (depending on the political input) local assets were also affected by the Fed’s monetary policy. According to our analysis, almost half of the market noise in the months prior to elections was related to the Fed, particularly in 2018. As a result, we must not disregard the potential impact of lower US rates when assessing the outlook for global and local markets in the following months.
- Elections in Mexico: In June, Mexicans will elect a new president but also members of the Federal Congress and Senate, nine governors and 30 state mayors. In addition, in the next six years the new president will appoint many key public figures.
- Differentiating short-term noise from what is important: From a short-term perspective, volatility usually responds to political noise. In previous elections, volatility rose and the MXN depreciated in the months prior to the election, irrespective of candidate, party or even polls gauging public sentiment. In the mid and long term, attention should be on specific proposals and, more importantly, potential risks. The scope for fiscal consolidation, risks related to the Supreme Court, Congress and potential constitutional reforms and the future of energy reform (Pemex and CFE and the role of the private sector) etc, will be under investor scrutiny.
- Market volatility vs. MX macroeconomic foundations: Global volatility has remained stable at record lows so far in 2024 as the US is heading into a soft landing while inflation has stabilised. Provided these factors continue, local political noise will be temporary. Nevetheless, the state of the MX economy does matter, and we believe Mexico’s macroeconomic fundamentals have deteriorated. The public deficit for 2024 has been the highest in decades, and while debt is low relative to other EMs, it is also exceeds levels during previous electoral races. This is important when considering the risk Pemex represents to government finances in the coming years.
- Elections in the US: A real game changer: This year, global investors will follow the US presidential election closely, focusing mostly on global trade, fiscal stability, geopolitical uncertainty, domestic and international policies and border control. Regarding Mexico and its relationship with the US, beyond bipartisan economic proposals, attention will be on migration policies, security, borders and trade, among other topics. A more protectionist approach cannot be ruled out, which would certainly increase volatility in local assets.
- All in all, we are maintaining our bearish view of the MXN and recommend buying volatility at current levels.