Morgan Stanley, a New York-based investment bank, has recently downgraded its investment outlook for Mexico, issuing an “underweight” warning on Mexican shares. The reason behind this downgrade is the concern over the federal government’s proposed judicial reform. In a “Latin America Model Portfolio” report published on Tuesday, the bank stated that it was downgrading Mexico to underweight following the judicial reform proposal sent to Congress by President Andrés Manuel López Obrador.
The proposed judicial reform aims to allow Mexicans to directly elect judges, including Supreme Court justices, starting next year. While the president, Congress, and the judiciary would nominate candidates, opponents argue that this reform could jeopardize the independence of the judiciary and reduce checks and balances on executive power. The potential politicization of the judiciary, especially during political elections, is a major concern for investors like Morgan Stanley.
In its report, Morgan Stanley highlighted that replacing the judicial system could increase risk, Mexico’s risk premia, and limit capital expenditure. This poses a significant challenge as nearshoring, a key investment opportunity in Mexico, is facing bottlenecks due to factors like insufficient infrastructure and resources. The bank also mentioned that the judicial reform presents risks to Mexico’s investment narrative, which has been a point of attraction for investors in the past.
The concern over the proposed judicial reform has already had an impact on the Mexican peso, which has depreciated against the US dollar. The uncertainty surrounding the reform and other constitutional bills sent to Congress by López Obrador has led to increased risk aversion among investors. The possibility of Morena and its allies having a two-thirds majority in the Chamber of Deputies, allowing them to approve constitutional reforms without opposition support, adds to the apprehension.
Morgan Stanley recommended reducing exposure to some Mexican stocks and eliminating others from investment portfolios altogether. Key holdings like Walmex, Femsa, and Coca-Cola Femsa were advised to have their weights lowered, while companies like América Móvil, Cemex, and Grupo México were not affected by the recommended changes. The bank’s portfolio adjustments reflect the cautious approach towards Mexican investments in light of the proposed judicial reform.
Overall, the downgrade in investment outlook for Mexico by Morgan Stanley underscores the growing concerns among investors regarding the potential impact of the proposed judicial reform. The uncertainty surrounding the reform, along with other constitutional proposals, has created a sense of unease in the investment community. As Mexico navigates through these changes, it will be crucial for policymakers to address investor concerns and maintain the country’s attractiveness as an investment destination.
