Capital Economics sees a difficult year ahead for Mexican assets De Investing.com

Capital Economics has anticipated underperformance for Mexican peso and broader financial assets in the coming year due to political and economic instability.

The peso, which has recently depreciated about 15% against the dollar since the beginning of April, is still viewed as overvalued despite its significant decline in July and August.

Mexican financial assets, including local currency stock and bond indices, have lagged emerging market (EM) peers this year in dollar terms, with the exception of hard-currency Mexican bonds.

The weak performance is attributed to three main factors: President Amlo’s controversial constitutional reforms, the unwinding of yen-financed shipping trade and concerns about the impact of a potential US recession on Mexico due to its close economic ties to the US.

The future performance of Mexican financial assets is expected to depend on these aspects. Although some bad news may already be factored into current asset prices, the domestic outlook remains challenging.

New President Sheinbaum will face economic difficulties, including deteriorating public finances and the debt burden of state oil company Pemex, which could affect Mexico’s sovereign credit rating.

Capital Economics suggests that if the US avoids a recession, global risk appetite could remain strong, benefiting Mexican assets and the peso. However, potential interest rate cuts by Banxico following Fed policy easing could limit these gains.

In addition, the outcome of the US election poses a risk, Mexican assets could suffer in the event of a Trump victory due to his policies on immigration and tariffs.

Investor sentiment towards Mexican financial assets may deteriorate further, as indicated 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 may be room for further declines, he pointed out The economy of capital.

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