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NEAR-TERM VOLATILITY ASIDE, MEXICO COULD WEATHER THE TARIFF STORM QUITE WELL

A perfect mix of global trade tensions and a possible U.S.-China trade decoupling could be just what Mexican assets need, BCA Research say as they remain bullish on the Latin American country and see strong returns in the long run.

While noting pressure on EM assets in the short-term as a global growth slump should hit cyclically-exposed economies hard, Juan Egaña, a strategist at BCA Research believes that Trump's global trade war will help Mexican assets and the currency to outperform EM in the "medium to long" term.

Given America's security concerns and geopolitical tensions with China, a possible favoring of Mexico can emerge for America's trade needs, Egaña writes.

Egaña estimates that the underlying tariff figure for Mexico is much less malign than what the headline number suggests, if one accounts for all the exemptions under the United States-Mexico-Canada Agreement (USMCA) trade agreement.

"Due to the manufacturing interconnectedness between the US and Mexico, Trump will opt to maintain trade flows with Mexico as freely as possible to protect American industries," he says in the note.

BCA estimates that U.S. multinational companies own a significant share of Mexican manufacturing. As such, they expect U.S. President Donald Trump to be sympathetic to lowering tariffs on Mexico, as that can hurt corporate profits and possible lead to higher prices for the American consumer.

Hurting Mexico's manufacturing industry could hit one of Trump's signature policies - cracking down on immigration.

The "maquiladora" sector - factories located in Mexico but owned by a foreign company - remains a key point as hostile trade policies could lead to layoffs, further raising the possibilities of illegal border crossings in the United States.

BCA Research recommends investors remain "overweight" on Mexican stocks, local bonds, as well as sovereign credit and sees Mexico attracting foreign direct investment (FDI) inflows as the U.S. diversifies away from China.

(Shashwat Chauhan)

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