Capital economy has expected underperformance for the Mexican peso and broader financial assets in the coming year due to political and economic instability.
The peso, which has recently suffered a depreciation of around 15% against the dollar since early April, is still considered overvalued despite the significant decline in July and August.
Mexican financial assets, including stock indices and local currency bonds, have underperformed peer emerging market (EM) peers in dollar terms this year, with the exception of Mexican hard currency bonds.
The poor performance is attributed to three main factors: controversial constitutional reforms by President Amlo, the phasing out of the yen-funded carry trade, and concerns about the impact of a possible US recession on Mexico due to its close economic ties with the US.
The future performance of Mexican financial assets is expected to depend on these issues. While some bad news may already be factored into current asset prices, the domestic outlook remains challenging.
Incoming President Sheinbaum will face economic challenges, including deteriorating government finances and the debt burden of state oil company Pemex, which could impact Mexico’s creditworthiness.
Capital Economics suggests that if the US avoids a recession, global risk appetite could remain strong, which would benefit Mexican assets and the peso. However, potential rate cuts by Banxico due to Fed policy easing could limit these gains.
Furthermore, the outcome of the US elections poses a risk, with Mexican assets likely to suffer from Trump’s victory due to his policies on immigration and tariffs.
Investor sentiment toward Mexican financial assets could deteriorate further, as evidenced by rising risk premia. Despite the peso’s depreciation, it is still considered somewhat overvalued and could weaken further.
The current exchange rate of 19.4 does not reflect historical weakness, suggesting there is room for further declines. Capital economics.
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