Tae Yoon Kim, CFA, FRM
Alex Nae, M.Sc
- A beneficiary of nearshoring, Mexico is a “real economy” market with indirect exposure to the AI infrastructure build-out
- Recent relative outperformance driven by industrials and materials, with supportive valuations and a rate-cutting cycle
- The 2026 United States-Mexico-Canada Agreement (USMCA) [note1] review is the key near-term event, likely to shape future investment flows and trade dynamics
Following Brazil[note2] , we continue the series of short insights into LatAm markets with an overview of Mexico. Since 2023, Mexico has become the most important US trading partner, accounting for 15.4% of total US imports; IMF [note3] estimates indicate that between 2017–2023, $70 billion (or circa. 45%) of Mexico’s export gains were attributable to US tariffs on China.
This trade diversion effect has been further reinforced by global supply-chain shifts following the Covid pandemic and geopolitical disruptions, including the war in Ukraine [note4]. Together, these factors have positioned Mexico as a central hub in North American manufacturing.
The FTSE Mexico Index performance (TR, USD) was 54.1% in 2025 and 10.6% year-to-date [note5] in 2026, whilst the FTSE Emerging and FTSE All-World indices returned 26.5% (7.3% YTD) and 23.1% (6.8% YTD) respectively.
As a net exporter of crude oil, Mexico is relatively insulated from the effects of the Iran conflict. This aligns with our earlier note on Brazil, where we discussed how EM markets that are net oil exporters show a higher level of resilience to oil supply shocks. Thus, a continuation of the conflict is likely to have a milder negative impact on growth.
Nearshoring ("Friendshoring")
Figure 1: Value of US imports (U.S. Census Bureau).
Mexico has been one of the largest beneficiaries of the nearshoring trend, as proximity to the US makes it the de facto manufacturing hub for North America. As such, Mexico is part of the USMCA, where compliant exports receive preferential treatment, boosting trade and improving competitiveness for the country.
Over 80% of its exports (>25% of GDP) go to the US and supply chains are deeply integrated. Thus, Mexico has seen improving exports in tariff-affected industries such as electronics, machinery or autos. For instance, high-technology exports currently represent 17.6% of the country’s manufactured exports.
Despite these tailwinds, GDP expanded by a modest 0.8% in 2025. Whilst exports grew by 7.6%, resulting in the first trade surplus since 2020, and FDI rose by 10.8%, the economy continues to operate with a negative output gap and lagging domestic investment. The IMF [note6] projects a more moderate GDP growth of 1.6% in 2026 and 2.2% in 2027.
As part of the EM structural re-rating story
We have previously highlighted [note7] the structural improvement underway across EMs, driven by stronger policy frameworks and economic fundamentals. Mexico can be viewed within this broader re-rating narrative, as it receives support from a combination of targeted fiscal initiatives and credible monetary policy.
To address the weak growth, President Sheinbaum launched “Plan Mexico” in 2025, a six-year strategy to reduce inequality by boosting economic growth. Its three pillars are facilitating private investment, closing infrastructure gaps and promoting domestic supply chains, with the following goals:
- Raise investment to 25-28% of GDP (from current 22%)
- Create 1.5 million jobs in manufacturing and strategic sectors
- Expand public-private partnerships and infrastructure spending
Still in its early stages, Plan Mexico provides a credible framework, signalling the government’s intent to address supply-side bottlenecks in energy and infrastructure. However, progress against its own targets has so far been gradual, and whilst investor sentiment has improved, markets still await greater policy clarity and real implementation.
central bank policy rates
Figure 2: Central bank policy rates.
On the monetary policy front, the Bank of Mexico (Banxico) began its tightening cycle in 2021, much earlier than its DM peers, which helped anchor expectations. With inflation now expected to ease closer to its 3% target, Banxico has been in a rate-cutting cycle, last lowering to 6.75% in March ‘26 despite projected tightening from other central banks stemming from inflation risks from the Middle East.
The 2026 USMCA review is a key catalyst
Apart from a slowdown in growth, a greater near-term risk driver for Mexico lies in the USMCA review, with a deadline of 1st of July. The 2026 review is not a full renegotiation but an assessment whereby the three countries must decide whether to extend it for 16 years. In the case of no extension, the agreement would enter a joint review cycle every year until 2036.
The backdrop is not the most congenial. The US is increasingly wary of Chinese companies setting up shop in Mexico to circumvent tariffs, hence is pushing for tighter rules of origin, stricter domestic content thresholds and curbs on Chinese FDI.
On a more positive note, US and Mexico continue to trade broadly under the USMCA framework (leaving a number of US tariff increases aside), and the base case remains that the close trade relationship and integration will be preserved. President Sheinbaum has pursued maximum accommodation, conceding on US demands regarding immigration and security.
Mexico has shown resilience navigating through periods of policy uncertainty and trade tensions. The upcoming review will be a pivotal moment that could either unlock delayed FDI or create new volatility.
A Value Market with Structural Tailwinds
Figure 3: Mexico vs All-World vs Emerging vs India vs China vs US: Forward PE and ROE
The FTSE Mexico Index trades at a 12M Forward PE of 12.9x, compared with 13.1x for the FTSE Emerging Index. Their respective ROEs stand at 15.6% and 12.8%.
Performance Comparison (Rebased to 100)
Figure 4: Select FTSE Indices 2026 YTD performance.
Source: FTSE Russell/LSEG. Data as of 1st of May 2026. Past performance is not a guide to future returns. Please see the end for important legal disclosures.
Robust gains were mainly driven by Basic Materials and Industrials. Though to a lesser extent than Brazil, Mexico is partly a commodity-linked economy, benefitting from exposure to industrial metals such as copper and silver, alongside green energy transition and the AI infrastructure build-out. Increasing demand for construction of nearshore data centres has helped cement Mexico’s position as a “picks and shovels” beneficiary of AI.
Conclusion
Against the recent backdrop of geopolitical uncertainty, Mexico has been underpinned by its structural drivers, namely nearshoring, deep supply-chain integration with the US and its industrials/materials tilt. The upcoming USMCA review and progress under Plan Mexico will be key signals to gauge whether investment, infrastructure and policy can align to sustain momentum and support a broader market re-rating.
footnotes
[1] In effect from 1st of July, 2020, the USMCA replaced the North American Free Trade Agreement (NAFTA) implemented in 1994. The USMCA is a modernisation of its predecessor, mainly concerning intellectual property and digital trade. | Back to Note 1
[2] More than a barrel trade: Brazil | LSEG | Back to Note 2
[3] Relocation of Global Value Chains: The Role of Mexico, WP/25/180, September 2025 | Back to Note 3
[4] The conflict further accelerated supply chain diversification trends already underway, as it highlighted the vulnerabilities of relying on long-distance, just-in-time supply chains, and prompted companies to look for more secure, nearby alternatives. Countries like Mexico were net beneficiaries of this reshuffling in supply chains. | Back to Note 4
[5] As of 30th of April 2026. | Back to Note 5
[6] World Economic Outlook, April 2026; Global Economy in the Shadow of War; April 14, 2026 | Back to Note 6
[7] Emerged: The structural re-rating of Emerging Markets | LSEG | Back to Note 7
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