Jun
In a landmark election on Sunday, Mexico is on the verge of electing its first female president. The race, featuring two women candidates, could significantly boost investor interest in a country strategically positioned to benefit from the ongoing U.S.-China rivalry.
Market Performance and Current Challenges
The iShares Mexico exchange-traded fund has been a strong performer, delivering an average return of 13% over the past three years, making it one of the top emerging market funds. However, the fund has seen a 4% decline this year due to persistent high U.S. interest rates and electoral uncertainties in both Mexico and the U.S.
Despite recent declines, iShares Mexico ETF’s strong historical performance suggests resilience amidst current uncertainties, Barron’s Print Edition said.
Key Candidates and Market Implications
Claudia Sheinbaum, the favored candidate and protégé of outgoing President Andres Manuel Lopez Obrador (AMLO), is up against conservative opposition candidate Xóchitl Gálvez. This unprecedented contest between two women marks a significant moment in Mexican political history.
Market analysts, including Varun Laijawalla of Ninety-One, suggest that a decisive victory for Sheinbaum, by a margin of 8 to 15 percentage points, would be the most favorable outcome for the stock market. This would ensure stability without compromising institutional checks and balances.
Policy Continuity and Investor Confidence
Sheinbaum will likely uphold AMLO’s policies, drawing investment from giants like Tesla, General Motors, and Foxconn. Economist Kimberley Sperrfechter anticipates that Sheinbaum’s retention of social programs will favor consumer-oriented stocks. This continuity signals ongoing efforts to diversify supply chains and lessen reliance on China. Sheinbaum’s approach may foster stability and further economic growth in Mexico.
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Fiscal Challenges Ahead
AMLO’s administration has increased spending on social programs, raising the deficit from 3.5% to 5% of GDP. The next president will face the challenge of either cutting spending or increasing taxes, with potential tax hikes on banks being a consideration.
Short-Term Market Risks
A loss for Sheinbaum or a narrow, contested win could lead to market volatility. However, Laura Geritz of Rondure Global believes that past selloffs due to political issues in Mexico have been brief and that the country’s strong economic fundamentals remain intact. She favors consumer-oriented stocks like Coca-Cola Femsa and tequila maker Becle S.A.B. de C.V. (CUERVO).
Positive Market Outlook
J.P. Morgan strategist Adrian Huerta predicts a 10% rise in the Mexican stock market. The market could reach a bull-case target of 63,000. Positive election outcomes, a strong U.S. economy, and reshoring production trends drive this prediction. Laijawalla sees market pullbacks as buying opportunities, highlighting industrial real estate companies like Fibra Uno Administracion (FUNO).
Potential Complications from U.S. Election
The upcoming U.S. election adds a layer of complexity, with potential rhetoric around tariffs and immigration, and possible revisions to the U.S.-Mexico-Canada trade agreement (USMCA). However, Mexico’s role as a crucial partner in reducing reliance on China could mitigate economic impacts despite heightened political volatility.
Long-Term Investment Opportunities
Despite potential short-term challenges, Mexico presents a promising scenario for long-term investors. The country’s strategic importance in the global supply chain, coupled with significant long-term investments, offers substantial opportunities for those seeking to capitalize on these economic shifts.
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