Mexico: Assets likely to continue underperforming after Trump’s victory - BBH
According to analysts from Brown Brother Harriman, the results of the US election will have an impact on Mexico, with unknown extensions. They see Mexican assets likely to continue underperforming.
Key Quotes:
“Donald Trump will be inaugurated on January 20, 2017. He ran on a platform that had anti-trade and anti-immigration planks. While we suspect that Trump the president will behave differently from Trump the candidate, markets will be watching for clues to the likely policies of his administration.”
“Banxico holds a regular policy meeting on November 17. We think it’s likely to hike rates 50 bp to help limit inflation pass-through. Earlier today, October CPI came in at 3.1%, above the 3% target but within the 2-4% target range.”
“The official 2017 growth forecast was cut to 2-3% from 2.6-3.6% forecast back in April. We think the forecast will have to be cut again significantly, and that will lead to further pressure to tighten fiscal policy.”
“If the US were to exit NAFTA, the negative impact on the Mexican economy would be large. Exports account for almost a third of Mexico’s GDP, with most of those going to the US. In 1990, this ratio was less than half that, at around 15%. NAFTA was a major factor behind the growth of Mexico’s external sector, and so less trade would harm the Mexican export sector and overall growth in general.”
“A US exit from NAFTA or renegotiated terms would most likely lead to higher tariffs and inflation in both countries. Freer trade typically benefits the smaller, more open economy more than the larger, less open one. The negative impact of less free trade would thus be greater on the smaller, more open economy, Mexico.”
“USD/MXN traded at a new all-time high near 20.78 in overnight trading before falling back to below 20 currently. Volatility is likely to remain elevated, while further weakness appears likely as uncertainty over what a Trump presidency really entails will continue well into next year.”