Will Tariffs Lead to Buying Opportunities for Mexican Stocks?

Investors often focus on what’s right in front of them. With US stocks on track to deliver back-to-back years of gains of over 20%, it’s easy to overlook how other global markets aren’t sharing that success. One example is just south of the border. Mexico is one the worst-performing country stock markets this year, down nearly 20%.

As outlined in our recently released 2025 Investment Outlook for Financial Advisors, several factors explain this decline:

• Profit taking: Mexican stocks significantly outperformed broader emerging markets over the prior two years, prompting investors to lock in gains.
• Election uncertainty: Mexico’s June 2024 presidential election raised concerns about potential impacts on the rule of law, spurring selling.

The US election has further compounded these problems. Rumors of a “tariffs for everyone” policy in the United States, potentially imposing 25% tariffs on all imports from Mexico, add even more pressure. While specifics remain unclear, such measures would have far-reaching implications.

According to Trend Economy, roughly 80% of Mexico’s exports go to the US—a figure that has accelerated higher in recent years. Notably, in 2023, Mexico became the US’s largest global trade partner for the first time, with trade volumes (imports and exports combined) reaching nearly $800 billion.

Trade between the two countries is poised to hit another record in 2024, fueled by the continued growth of manufacturing plants in Mexico’s northern states specifically geared toward exports to the US. This underscores the critical importance of this trade relationship for both countries.

While the coming months will likely involve political theatre and debates about who’s “winning” and “losing” in the trade relationship, we believe Mexican equities are undervalued. Further negative sentiment surrounding US-Mexico trade relations could push valuations even lower, furthering the potential opportunity for long-term investors.

Three key factors underpin this investment thesis:

• Domestic focus: Despite its economy’s strong ties to the US, Mexico’s stock market is largely domestically oriented. Many listed companies generate most of their revenues within Mexico, making the market less susceptible to trade disruptions than conventional wisdom may assume. As one example, Wal-Mart de Mexico, commonly known as Walmex, represents nearly 7% of Mexico’s equity index. Over 90% of its revenue is generated in Mexico, with the remainder coming from Central America. The company operates independently from Walmart US WMT, adapting its strategies to meet the needs of local markets.
• Defensive characteristics: The Mexican stock market leans defensive, with over 40% of its composition in the consumer staples and communication services sectors. These sectors have historically been characterized by steady cash flows, reliable dividends, and strong balance sheets, offering resilience amid uncertainty.
• Attractive valuations: Mexican stocks are relatively cheap. With US equity markets near peak valuations, valuations in Mexico look more attractive, particularly since much of the future cash flows come from stable, defensive sectors.

Taking everything into account, including the elevated uncertainty surrounding Mexico, we believe the market offers a compelling entry point for long-term, valuation-focused investors. Our valuation models project an annualized return potential of 8.5% in US dollar terms over the next decade.

Investing ultimately comes down to relative choices. While US stocks are performing well, supported by strong fundamentals, their valuations rank among the highest globally, reflecting this strength. In contrast, despite fundamental questions and being enveloped in storm clouds, Mexico’s stock market trades at much more reasonable prices due to these known challenges.

A simple message for investors? Uncertainty often creates compelling buying opportunities, especially for those patient enough to endure short-term volatility.

Consider the example of Canadian Pacific Kansas City CP, a $70 billion railroad operator with a 20,000-mile track network stretching from Canada’s ports through Midwest rail centers in Chicago and down to factories in Mexico. This company would ostensibly be in the crosshairs of potential tariffs, which could disrupt cross-border trade and deliver a knockout punch to parts of their business.

Yet a recent Wall Street Journal article highlights a surprising reality: “Between 2018 [when tariffs were first introduced] and 2023, freight flows between the US, Canada and Mexico rose 28% by value. The amount moving on railroads increased 17% over the same period.”

Canadian Pacific spokesperson Patrick Waldon further clarified: “While there was rhetoric and headlines, ultimately free trade in North America increased significantly during the first [tariff saga] and a new free-trade agreement was established.”

If you only read the headlines, you may miss important details. A differentiated perspective on out-of-favor assets is often where interesting investment opportunities can be uncovered.