Mexico and Brazil: Beneficiaries of the Fed Pause and Trade Rerouting

Over the last year, Brazil and Mexico have benefited from the shifting trade relationships and more recently the global disinflationary trends. While the trade vectors are different – Brazil is a rare source of new commodity exports, while Mexico is a near-shoring or China divestment winner, both stand out for their extensive (perhaps over active) past monetary tightening which has given them space to begin (or soon begin) easing, supporting the carry trade. It has also allowed them to manage the widening of fiscal gaps. The outlook is likely to continue to be positive though geopolitical risks associated with the US elections and headline risk associated with Brazil’s ties with Russia and other BRICS countries remain a concern. This will temper the performance of growth sensitive assets. 

• High positive real rates in both countries supported carry trades, spread compression and their currencies which are some of the top performers in the emerging world. This very rate buffer has been a challenge for domestic demand, leaving the countries reliant on the resource sector (Brazil) and auto/manufacturing nearshoring (Mexico). 
• Brazil equities, especially the banks, have benefited from the monetary easing. Most of this story is now priced in. The markets are likely overly optimistic about the degree of easing. 
• The rate environment remains a drag on Mexico’s equity and domestic demand, but this should improve. The onset of monetary easing later this year should start to be priced in, shifting from a rates trade to a more growth supportive one. 

Political and Policy Risks: Can the countries keep hedging?

• The electoral outcome in Mexico remains a source of uncertainty. While market actors feel strongly that Sheinbaum/Morena will win, they worry about the scale of the legislative victory. 
• The big Mexican risks are fiscal, absorbing the capital flows and policy risks from the bilateral relationship with the US. USMCA renewal comes up in 2026 and the unbalanced trade relationship could become a political football. 
• Brazil too has to balance geopolitical risks. It has hedged via greater involvement with an expanding BRICS, which increases its ties with sanctioned countries (Russia and now Iran) and has also aimed to join OPEC+ as a country not subject to quotas. Greater sanctions enforcement on Russian trade including price cap enforcement and secondary sanctions. This could limit the benefits from discounted Russia trade and add financing risks.