Thoughts from the Road: Mexico
We recently made a quick trip to Mexico City, alongside our colleagues Gio Onate and Nicolas Mira, to get an update on how the United States’ largest trading partner is performing at a time of heightened uncertainty. During our visit we met with CEOs, clients, sell-side representatives, members of the media, and individuals close to the central bank. While we did spend time discussing macro, most of our meetings in Mexico left us with a distinct sense of ‘déjà vu’ in terms of what we have been seeing not just in Mexico but also in many other parts of the world. Our experience in Mexico suggests to us that we are all part of a larger narrative about how the global economy and markets will operate in the Regime Change we have been discussing for quite some time. See below for full details, but we left Mexico City with seven key takeaways.
1. Without question, we are all still living in an asynchronous global recovery.
Despite its being the United States’s largest trading partner and its neighbor, Mexico – similar to many of its global peers – is actually not reaping rewards from the strength of the U.S. economy. In fact, Mexico’s economy may actually stall during the next few years, as it is hindered by restrictive monetary conditions (real ex-ante short rates are at 5.6%, compared to zero to two percent for most of the rest of the developed world), negative private investment due to judicial reforms and tariff uncertainty, fiscal consolidation, and a slowing – albeit still solid – consumer.
2. As we saw in Mexico, uncertainty is now slowing global growth.
The global euphoria that surged post-President Trump’s election around deregulation and M&A has clearly cooled, we believe. As we detail below, uncertainty about U.S. domestic policy as well as trade policies is having a near-term chilling effect across many global economies. In Mexico, for example, the central bank is clearly seeing this deceleration, as evidenced by its recent commentary that the balance of risks to activity “remains skewed to the downside.”
3. The Mexican peso is an important reminder that trade wars do not occur in a vacuum.
In both Mexico and China, local currency depreciation is already acting as a major offset to many of the competitive advantages the U.S. government is targeting from implementing tariffs.
4. But are these trade wars really about trade, especially in Mexico?
Our take at KKR, which our visit to Mexico City confirmed, is that the U.S. is actually embroiled in a multi-faceted negotiation across geographies that involves security, drug trafficking, border issues, and economic questions. Trade policy is one negotiating tool the U.S. and other nations are using. No doubt, trade is important, but we think that some market pundits lobbing in views from afar may be missing the real narrative. We also think it is worth flagging that in 2025, the best performing markets are actually the ones that face tariffs, a reflection on how bad current sentiment is towards Mexico, China, and Europe these days (see Exhibit 11).
5. Mexico’s absolute yields on its debt are an important reminder that Credit has become a competitive asset class for global investors.
The post-COVID world has ushered in a Regime Change with a ‘higher resting rate’ for inflation. With overnight rates at 9.5% (and inflation less than four percent), we think Mexico’s high absolute yield on its government and corporate debt highlights the attractiveness of Credit for global allocators. We like the front end of the curve in Mexico, and we also believe there will be opportunities for Private Credit lenders to lend in Mexico, especially through such areas as Asset-Based Finance.
6. The need for private sector capital to offset burgeoning government deficits will continue to increase around the world, including in Mexico.
Another shift in the global landscape post-COVID is that governments across the globe are now over-leveraged, necessitating private sector involvement to fund new initiatives, particularly around fixed investment. On the Infrastructure front, there is certainly opportunity in Mexico for power generation and Natural Gas Storage. It remains early days, but the administration would also like to increase the renewable energy mix to 45% by 2030, from around 25% today, which should mean solar/wind buildout opportunities in the north and south, respectively. However, recent changes to the judicial system, security, and rule of law concerns may weigh on economic activity and likely mean that higher risk premiums must be assigned to any deal.
7. The ongoing blurring of economics and national security.
Similar to what we have seen in China, India, and Japan, Mexican authorities are also changing their retirement savings laws to encourage greater investment in the local economy. All told, the AFOREs (national savings plans) can now allocate 30% to Alternative investments (up from 20% previously), with a view to boosting the mix of local private investments over time. The bigger picture conclusion, we believe, is that deglobalization is impacting much more than just supply chains as politicians around the world look for ways to drive down their cost of capital to ensure that their economies remain competitive in a rivalrous world.
