Capital economics has penniless results were expected the Mexican peso and broader financial assets in the coming year due to political and economic instability.
The peso, which has fallen about 15% against the dollar since early April, is still considered overvalued despite a significant drop in July and August.
Mexican financial assets, including equity indices and local currency bonds, have underperformed emerging market (EM) assets in dollar terms this year, with the exception of Mexican demanding currency bonds.
The penniless performance is attributed to three main factors: controversial constitutional reforms by President Amlo, the unwinding of yen-financed carry trades, and concerns about the impact of a potential U.S. recession on Mexico given its close economic ties with the U.S.
The future performance of Mexican financial assets is expected to hinge on these issues. While some of the bad news may already be priced into current asset prices, the domestic outlook remains challenging.
Incoming President Sheinbaum will face economic headwinds, including deteriorating public finances and the debt of state oil company Pemex, which could impact Mexico’s credit rating.
Capital Economics suggests that if the US avoids a recession, global risk appetite could remain forceful, benefiting Mexican assets and the peso. However, potential rate cuts by Banxico, following the Fed’s easing, could limit those gains.
In addition, the outcome of the US elections carries risks, as Mexican assets could suffer if Trump wins due to his immigration and tariff policies.
Investor sentiment toward Mexican financial assets could worsen further, as indicated by rising risk premiums. Despite the depreciation of the peso, it is still considered slightly overvalued and could weaken further.
The current exchange rate of 19.4 does not reflect historical weakness, suggesting that there is scope for further declines as indicated Economics of capital.
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