Morgan Stanley recommends not investing in Mexico; it sees rising risk

Julio Gutierrez and Clara Zepeda

The newspaper La Jornada
Wednesday, August 21, 2024, p. 5

The American investment bank Morgan Stanley, one of the three largest in the global financial system, recommended its clients not to invest in shares of some Mexican companies and to reduce their participation in others, arguing that the initiative to reform the Judicial Branch will increase risk premiums in Mexico.

The decision was announced on the same day that Citibanamex – a subsidiary of the also American Citi – assured that the Mexican financial market – where stocks, bonds and currencies are traded – appears to have disdained the negative political impact of the judicial reform proposed by President Andrés Manuel López Obrador, as well as underestimating its economic risk.

In a note to clients on Tuesday, Morgan Stanley said it had reduced the weighting of Mexican instruments in its investment portfolio recommendation, Following the proposal for judicial reform that the Executive sent to Congress.

The report was published yesterday, although the initiative was presented by President López Obrador to Congress last February.

“We have moved to an underweight position in Mexico. We are cautious on equities – stocks traded on stock exchanges – in the Latin American region,” the US investment bank said.

“We downgraded Mexico to underweight following the executive branch’s judicial reform proposal to Congress. We believe that replacing the judicial system should increase risk, as well as Mexico’s risk premiums and limit capital spending. That is a problem, since the relocation of companies (known as nearshoring) is reaching key bottlenecks.”

Contrary to the decision on Mexican securities, Morgan Stanley increased the weighting of Brazilian securities in its recommended investment portfolio.

The judicial reform proposed by President López Obrador – and supported by President-elect Claudia Sheinbaum – poses risks to the country’s investment narrative. We will reduce the weight of key holdings in the country such as Walmex, Femsa and Coca-Cola Femsa, and eliminate Kimberly Clark Mexico, Laureate and Qualitashe explained.

Separately, Citibanamex’s analysis department stated that everything indicates that national and international financial markets underestimate the implications that the approval of a judicial reform and a qualified majority of Morena and its allies in Congress could have.

The market does not seem to have fully discounted that there will indeed be a qualified majority of Morena and that the judicial reform will be approved; it also seems to have disregarded the negative political impact of this and other reforms, as well as underestimated their economic risk.he noted.

He said that given the moderation in the reactions of the financial markets, it is possible that those who already discount the reforms consider that, Although these weaken democracy, they will not imply anti-market economic policies or weaken the macroeconomic framework..

Reform will limit investment

Uncertainty over possible changes to the institutional framework in Mexico, as well as a change in administration and more restrictive financial conditions, have reduced investment dynamism, which is why the economic analysis area of ​​Ve por Más (Bx+) has made an adjustment to its medium-term outlook.

Alejandro Saldaña Brito, chief economist at Ve por Más (Bx+), said that they have made an adjustment to their medium-term outlook. This is because a modest deterioration in the institutional framework (confidence) is taking place and financial conditions are more restrictive (high interest rates), which would reduce the dynamism of investment.

Saldaña Brito said the concern is that these changes to the Constitution will lead to a greater concentration of power in the Executive, less flexibility in public finances, impacts on the rule of law and restrictions on private initiative.

However, he considered that some external counterweights will prevail, such as rating agencies and the review of the trade agreement between Mexico, the United States and Canada (T-MEC).