Panic has taken hold of markets around the globe. A regime change is taking place in the political economy, and visibility is zero. The liberal model has been shaken to its core by the same system it has promoted and strengthened for decades. To the extent that the supply shock is assimilated, such as the effect of tariffs and the economic slowdown, fuelled by uncertainty, it is hard to find a tactical safe haven.
In this context, and given the rising anxiety about inflation (which is expected to be global), we may be losing sight of the fact that the blow to activity will be equally as severe, and likely even more so. Volatility and risk aversion seem to have largely spared the banking sector at this point. However, this shock has a devastating origin: the attempt to change the liberal economic model from the one country that championed it. The form of the state is changing, and confronting it will foster uncertainty. As such, the prevailing uncertainty has two origins: 1) the one derived from this shock on the economic model; and 2) the battle to oppose this new political and economic scenario.
In our view, the Fed's options are complicated, but from a comprehensive balance of risks perspective, financial and economic risks will be gaining weight. We would thus definitively rule out an upward adjustment by the Fed, and would rather leave the door open for an adjustment in tone: cuts are on the table. An unprecedented steepening of the curve could very well be seen, and this effect would compound the recent behaviour in the local market. Banxico has plenty of room at the moment; beyond exchange rate volatility, inflation should reach 3.0% this summer, or even lower, and the economy has already lost all the strength recorded in the previous cycle (there is a high probability that GDP will have contracted again in the first quarter of this year).
The sovereign debt environment (UMS) has become even more complicated. On the one hand, there is a lack of growth, and on the other fiscal policy space is limited. The likelihood of a rating downgrade is now not negligible. Furthermore, the global environment has already impacted the oil sector and the country risk premium will remain high.
Our Strategies in sum
1) The adjustment in USTs could begin to lose steam as the Fed positions itself for the shock. 2) We reinforce our constructive long-held view on the short end of the Ms. sector curve (2 to 7 years). The curve will continue to steepen and we expect Banxico to cut interest rates to 7.5% by YE25. The TIIE curve has gained strength given the immediate bet on rate cuts by Banxico. 3) We have been defensive in corporate credit, but have shifted toward ultra-defensive positions; in fact, given this environment, and due to the recently announced strategy for Pemex, we no longer recommend the short end of the curve (we are out of this market). 4) UMS vs. UST spreads are in line with our Asset Allocation from November of last year, continuing to widen. We still expect a higher premium in USD and higher CDS. 5) Equity neutral (targeting 55,850 pts for the IPC). 6) Overweight MBonos (short end) and Udibonos.