Capital Economics Predicts Mexican Peso Underperformance in 2021 Due to Political and Economic Instability
Capital Economics, a leading financial research firm, has forecasted a period of underperformance for the Mexican peso and other financial assets in the upcoming year. This prediction is based on the current political and economic instability in Mexico.
The Mexican peso has experienced a significant depreciation of around 15% against the US dollar since April, leading to concerns about its valuation. Despite the drop in value in July and August, the peso is still considered overvalued by experts.
Mexican financial assets, including equity indices and local currency bonds, have not performed well compared to their emerging market peers this year, except for Mexican hard currency bonds. This lackluster performance is attributed to three main factors: controversial reforms by President Amlo, the unwinding of the yen-funded carry trade, and fears of a potential US recession impacting Mexico due to their close economic relationship.
The future performance of Mexican financial assets will depend on these issues. While some negative news may already be priced into current asset values, the outlook for Mexico remains challenging. The incoming President Sheinbaum will face economic challenges such as worsening public finances and the debt burden of state oil firm Pemex, which could impact Mexico's credit rating.
Capital Economics suggests that if the US avoids a recession, there could be renewed global risk appetite that benefits Mexican assets and the peso. However, potential interest rate cuts by Banxico, following the Fed's easing policies, could limit these gains. The outcome of the US election also poses a risk, with Mexican assets potentially suffering in the event of a Trump victory due to his immigration and tariff policies.
Investor sentiment towards Mexican financial assets may worsen further, as shown 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, indicating a possibility for further declines, according to Capital Economics.
In conclusion, investors should be cautious when considering Mexican financial assets in the coming year due to the predicted underperformance and the various economic and political challenges facing the country. It is essential to stay informed about developments in Mexico and globally to make well-informed investment decisions.