Our Chief Latin American Equity Strategist explains how potential
changes in Mexico’s regulatory approach could have implications
for the country’s equity markets.
----- Transcript -----
Welcome to Thoughts on the Market. I’m Nikolaj Lippmann, Morgan
Stanley’s Chief Latin American Equity Strategist. Today I’ll talk
about Mexico’s recent judicial reform and its potential impact on
equities market.
It’s Friday, September 20, at 10am in Mexico City.
Mexico has made significant changes to its judicial system. After
winning two-thirds majority in both houses – enough to allow for
constitutional changes – Mexico policymakers have embarked on a
robust reform agenda. Their first stop is a comprehensive reform
of the judicial branch, which aims at replacing roughly 2,000
senior judges including the entire Supreme Court.
New judges will no longer be appointed but will now be elected by
popular vote. This is practically unprecedented in a global
context, and while the executive branch might still try to filter
future candidates, this new system will likely create a real risk
to checks and balances on the judicial branch as well as to
expertise and procedure. Additional reforms, including the
elimination of independent regulatory bodies, would likely
compound these risks.
The judicial reform could have a material impact on Mexican
equities. So much so, that we think Mexico goes from being an
investor favorite to a ‘show me’ story where investors are less
likely to give the market the benefit of the doubt. This is
likely to result in a derailing or lower set of multiples being
paid by investors in Mexican equities or higher risk premium
required to invest.
Essentially, the judicial reforms could add fiscal, labor and
concession/regulatory risk for Mexican companies, even though
Mexico has deep manufacturing ecosystems, and has been
well-positioned from the transition to [a] multipolar world. Just
to give you a sense. Mexico has already sailed past China in
terms of manufacturing exports to the United States, and are now
approaching the levels of the entire European Union in terms of
manufacturing export to the US.
These new reforms will raise significant investor concerns, so
much so that we’ve downgraded Mexican equities to underweight, a
second downgrade since June. Mexican equities have sold off
roughly 20 per cent in the past three months, in dollar terms.
And we think the judicial reform may contribute to further
decline. All in, we see significantly greater potential for
negative outcomes than positive outcomes going forward.
Looking ahead, we see three key challenges for Mexico:
First, the new judicial structure would raise concerns about the
independence of the judicial branch.
Second, the United States-Mexico-Canada Agreement, the USMCA, is
up for review in 2026, and Mexico's judicial reform could mean a
much deeper revision. Mexico has committed to maintaining
independent regulatory bodies for a number of areas, such as
telecom, electricity, in competition. The judicial reform could
complicate this commitment.
Electricity is a key challenge for Mexico, and it requires
immediate investments. Our nearshoring investment thesis stands,
but the electricity-related challenges are becoming more
pronounced, and they won’t be helped by investor concerns around
the judicial reform.
So all in, some businesses will be at greater risk from these
developments. We expect technology, digitalization, real estate
companies to be at the least level of risk, or the lowest level
of risk. Domestic concessions could be at more risk.
We will continue to bring you relevant updates as Mexico reforms
unfold.
Thank you for listening. If you enjoy Thoughts on the Market,
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