Our recent visit to Mexico

Our team was in Mexico City a few weeks ago, participating in meetings with investors, analysts and pension fund representatives. Prior to the visit, the team viewed the local situation with concern, marked by the political challenges that the next administration will face and the promotion of a more radical agenda considering the ruling Morena party's comfortable lead. We have formed a more constructive view of the local situation since the visit, where we see certain risks as more limited than what the market has priced in.

So far, there have been a few signs that are positive for the local view. First, president-elect Claudia Sheinbaum has held numerous meetings with the private sector and shown herself to be more open to reaching consensus than current president Andrés Manuel López Obrador, who was in constant confrontation with the business sector. In this scenario, the promotion of public-private partnerships is fundamental for national infrastructure projects.

Second, the administration of public finances will continue along the same lines, with current Finance Secretary Rogelio Ramírez de la O and his team confirmed. They have maintained a very explicit discourse in favor of fiscal convergence, requiring that the fiscal deficit to be reduced to between 3.0 and 3.5 points of GDP. While analysts expect this to take a few months, they have a positive view of the efforts to move toward that target and future announcements related to the matter.

Third, so far cabinet appointments have favored technical rather than political criteria, with collaborators who are close to Sheinbaum. Among the most prominent names are former Foreign Secretary Marcelo Ebrard as Secretary of the Economy, who will play a fundamental role in USMCA negotiations, where previous negotiation experience will be fundamental. There is also the recent appointment of Omar García Harfuch as Secretary of Security, repeating the role he held under Sheinbaum in Mexico City.

In line with the above, a reversal in local assets showing lower existing idiosyncratic fear has been observed, such as the MXN’s appreciation from 18.7 to 18.1 to the dollar, making it one of the best performing emerging currencies. Meanwhile, local rates have largely reversed their rise.

Despite the more favorable elements, it is important to note that there are risks on the horizon in this scenario, such as the possibility that López Obrador may advance reforms that damage business confidence – in particular the controversial judicial reform – and the chance that the public finance team may fail to contain spending pressures, losing the fiscal anchor.

In particular, the judicial reform – which would allow the election of members of the Constitutional Court by popular vote – is a proposal that causes significant concern due to its negative impact on the country’s institutional framework and the fact that it would condition the main counterweight that several bills that were considered negative and unconstitutional have had. However, several legislators have introduced restrictions on candidates and a transparent election mechanism, among others.

In particular, the judicial reform – which would allow the election of members of the Constitutional Court by popular vote – is a proposal that causes significant concern due to its negative impact on the country’s institutional framework and the fact that it would condition the main counterweight that several bills that were considered negative and unconstitutional have had. However, several legislators have introduced restrictions on candidates and a transparent election mechanism, among others.

On the other hand, the country’s economic challenges are focused on promoting its investment in infrastructure – especially water and electricity – along with building ports and highways to enhance nearshoring. In addition, there are citizen demands on the fight against organized crime and drug trafficking, strengthening education, improving pensions and the development of science and technology. This implies new fiscal pressures that will require adequate management of public finances.

Our vision has shifted since the visit toward a more constructive position regarding the local situation and we can see a tactical opportunity in local assets as we wait for certain issues to be confirmed in the coming months. Considering all elements, we believe that there are opportunities to be found in the Mexican market, but selection plays a fundamental role. There are companies with higher regulatory risk that, in our opinion, could still suffer in the short term, but we see interesting alternatives in certain companies with good profit dynamics and attractive valuations. The coming months will be fundamental as we await further news from the incoming administration, and we are constantly monitoring our portfolios.