Mexico Stocks Are Having a Great Week, But Itau Sees Risks Ahead

(Bloomberg) -- Mexican stocks are on track for their best week since December 2016 on optimism that policy makers will reach an initial resolution on Nafta as soon as next week.

A preliminary trade deal would remove one of the overhangs that has made it hard to value local stocks, and the benchmark gauge has surged 3.9 percent over the past five days, making it the world's best performing index in what was a volatile week for stocks globally.

Mexican equities have outperformed emerging-market counterparts as well as U.S. benchmarks this year. But analysts at Itau BBA warn that investors are ignoring risks like the potential for corporate earnings to falter amid slower economic growth or for July's election to produce a president who is seen as unfriendly to business.

Some risks do appear to be priced in, analysts led by Gregorio Tomassi wrote in a report. Before this week, Mexican stocks had fallen 6.6 percent this year, which dragged price-to-estimated-earnings ratios back down near their 10-year average of 15. That's below where most other global stock markets are trading, according to the report.

Still, Itau says stock weakness is likely as analysts and economists start trimming their earnings and gross domestic product estimates soon, given that the economy will probably face “transition challenges” next year, regardless of who is elected.

And of course there's no guarantee on Nafta. The negotiations could become a source of anxiety for companies again if talks extend beyond the July 1 ballot, Itau says.

To contact the reporter on this story: Michelle F. Davis in Mexico City at mdavis194@bloomberg.net.

To contact the editors responsible for this story: Arie Shapira at ashapira3@bloomberg.net, Brendan Walsh, Joanna Ossinger

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