Trade

MORENA has once again swept the Mexican election: Claudia Sheinbaum will be president, with little to no constraint in Congress. All in all, Mexican politics will remain stable and overall supportive of markets. In the medium term, fiscal spending will return to conservatism and the constitutional reforms will lead to mixed fiscal and economic repercussions. In the long term, however, fiscal and institutional risks will rise. We advise investors to remain overweight Mexican risk assets relative to EM in cyclical and structural time horizons, but prepare for Mexican markets to sell off in absolute and relative terms in the next couple of months.

China is trying to export its way out of its economic slowdown while the US has already formed a hawkish consensus on foreign policy and trade. Investors should take cover as global financial markets are underrating the new phase of the trade war, which will escalate from here.

In the near term, favor oil and oil producers outside the Gulf Arab states. Over a 12-month horizon, favor US and North American equities, defensive sectors over cyclicals, and safe-assets. Within cyclicals, stick to energy and defense.

Investors around Europe and North America are concerned that the stock market is increasingly overbought and vulnerable to exogenous risks. We agree and have good reasons to fear that festering geopolitical risks and the US election season will deal negative surprises.

In this BCA Special Report, we ask what policies investors should expect if Donald Trump wins the 2024 Presidential election. The answer is that a second Trump term would be much less positive for risky assets than the first. While the US will remain democratic and geopolitically preeminent no matter the outcome of the 2024 election, a second term Trump administration would likely oversee large budget deficits, continued wealth inequality, labor shortages, high import prices, and an erosion of checks and balances, possibly including at the Federal Reserve. Trade policy under a second Trump presidency represents the greatest cyclical risk to investors, and the sequencing of policies in general will be important to monitor. An early legislative priority of immigration over tax cuts, alongside the rapid imposition of new tariffs, would be the worst alignment for risky assets.

While 2024 will see various election risks, global geopolitical uncertainty is driven by the US election and its struggle with Russia, China, and Iran. The stock market can manage local domestic political risk. But it will correct upon a major outbreak of geopolitical uncertainty.

China will continue to suffer from a “triple crisis”. Though there could be a tactical bounce, cyclically we still recommend underweighting Chinese equities.