A quick recap

Credit markets have remained remarkably steady despite the rapid deterioration in risk sentiment in recent weeks. While EM credit has shown some weakness, spreads have widened just one basis point so far in March, delivering total returns of -0.56%. The EM corporate market’s reaction has been even more muted: total returns of -0.22%, which reflect its resilience in a volatile geopolitical world [1].

Local currency assets have held up given expectations of a potentially weaker US dollar amid a quicker and deeper rate-cutting cycle. Year-to-date, the dollar spot index has weakened by 4.4%, with the Brazilian real, Mexican peso and Polish zloty recording total returns above 3% [2]. This should give EM central banks space to cut policy rates further.

The biggest impact has been on the spreads of oil and gas names. However, this has been driven more by persistent weakness in oil prices and the Organisation of the Petroleum Exporting Countries intentions to relax production cuts soon. While the fallout has been limited, tighter US financial conditions could lead to wider higher yield spreads globally. We’re reassured by the strong starting EM balance sheets and the lack of major fiscal concerns across some of the larger EM countries. 

Geopolitics remain front and centre

The two largest geopolitical issues, Ukraine and the Middle East, have diverging implications. With Ukraine, any ceasefire agreement, no matter how robust or lasting, will see Central and Eastern European (CEE) governments boost defence spending. This excludes Poland, where defence spending is already above 4% of gross domestic product (GDP) [3].

Fiscal balances will deteriorate but could be offset through two channels. First, a German economic recovery would support increased budget revenue collection, creating a positive spillover effect for CEE nations. Second, a resumption in Russian gas exporters could drive down prices, providing relief to CEE trade balances and a minor tailwind for large EM companies.

In the Middle East, the ceasefires in Lebanon and Gaza remain fragile, with limited risk of significant fallout beyond the immediate area. Market spreads in Jordan have widened considerably due to the potential withdrawal of USAID (United States Agency for International Development funding), accounting for around 3% of Jordan’s GDP. A prolonged Gaza ceasefire would benefit Egypt, increasing trade through the Suez Canal and boosting revenues.

The US approach to tariffs remains highly uncertain, especially the path of future negotiations. Mexico and India are most exposed, with the US a sizeable export market in terms of GDP percentage.

Mexico is in the eye of the tariff storm. Many fear a trade war could cause lasting damage to the economy. However, the outlook is more positive than the headlines suggest. Our central case is that there will be a near-term resolution, allowing Mexico to build leverage ahead of a United States-Mexico-Canada Agreement (USMCA) renegotiation this year or next. Mexico’s relative advantage is increasing, driven by ongoing ‘nearshoring’ (companies moving their production sites closer to the US to reduce costs and improve efficiency).

The market seems to agree. The most recent repricing of Mexican corporates occurred after the election, with recent moves more muted. Indeed, Mexican credit-default swaps are only a few basis points wider. Let’s take a closer look.

Case study – Mexico

We spoke with several local Mexican bank economists and our views are largely aligned. We believe Trump is using tariffs as a bargaining chip ahead of early USMCA renegotiations. If tariffs persist longer than forecast, we think the impact on Mexico’s economy should be manageable. In the meantime, local and foreign investment will remain in a wait-and-see mode until there’s certainty on tariffs and the USMCA.

Tariffs and USMCA – a potted history

In June 2018, the US announced a 25% tariff on Mexican steel and a 10% one on aluminium. In response, the Mexican government briefly placed retaliatory tariffs on a small number of US goods, including motorboats, fresh cheese, bourbon whiskey, and cranberries. These targeted key republican strongholds to exert pressure on Trump.

In 2019, Trump escalated the situation by threatening 25% headline tariffs on all Mexican goods. Despite these threats, Mexico avoided tariffs. Why? Trump was building leverage ahead of the USMCA negotiations. We believe the current situation mirrors these tactics.

While the USMCA is due for renewal in July 2026, the people we spoke with expect it will be renegotiated (rather than renewed) in the second half of 2025. Likely outcomes to appease Trump include:

Economic impact

Locals expect US/Mexican relations to strengthen over the medium term, with the ‘nearshoring’ theme gaining momentum. As evidence, they highlight the post-2016 step change in export growth, which climbed from 6% to 8-10%.

Most expect Mexican Prime Minister Sheinbaum to remain diplomatic and cooperative on narcotics and migration issues. As a result, they believe the likelihood of the US imposing tariffs for 12 months, which is the downside scenario, is low. This would result in:

What might it mean for corporates?

Over 2024, Banorte, one of Mexico’s largest local banks, saw a 24% year-on-year increase in its corporate loan books as firms drew down on working capital lines, increased capacity and witnessed broad-based retail and industrial growth. In 2025, the bank expects the growth rate to moderate to 9-10% as investment decisions remain largely on hold.

Banorte compiles an internal leading indicator based on foreign direct investment (FDI) announcements and investment intentions. The latest report notes FDI has moved lower, which aligns with the weaker business sentiment suggested by the monthly Purchasing Managers Index data. High-frequency data suggests exports picked up in January, with US companies building inventories ahead of potential tariff announcements.

Impact on specific Mexican companies in our strategy

Utilities

Cometa (COMENG) is an energy company with US operations. However, only a small portion of its output goes to the California Independent System Operator (CAISO) market (8% of third-quarter 2024 12-month EBITDA). While it’s unlikely US tariffs would hurt its operations, retaliatory measures from Mexico could adversely affect the sector, particularly the Federal Electricity Commission (CFE). Mexico imports most of its natural gas from the US through pipelines. Higher gas costs could dampen demand in Mexico, and if these costs are not fully passed on to consumers, they could weigh on CFE’s results. Our base case is that significant retaliatory tariffs will be avoided.

Chemicals

Retaliatory tariffs are a concern for chemicals companies. Our portfolio companies only export 6-10% of volumes to the US (Orbia has US operations to serve the American market) [5]. We don’t think potential US tariffs will substantially harm company results. The medium-term risk is that companies will stop investing while markets remain volatile. On Orbia’s most recent results call, management stated, “Right now, we are still waiting for further clarity from the Trump administration on what's going to happen [before making final decisions].”

Property

Real estate investment trust operator Fibra Uno’s (Funo) occupancy rates are close to record levels. Funo has a broad set of clients across the industrial, retail and office sectors, and increasing rents (both in US dollars and in Mexican pesos) reflect positive demand trends. Higher rents and occupancy rates can be symptomatic of tight capacity. However, we believe structural factors are driving the favourable operating conditions and are unlikely to be affected by tariffs in the short term. For example, third-party logistics providers serving e-commerce companies such as Amazon and Mercado Libre are helping drive occupancy levels. 

As for economic data points:

Final thoughts…

Mexico is right in the middle of the noisy US tariff negotiations. However, the direct impact on our holdings remains limited, becoming even more muted the further we get from the action.

What about the rest of the EM corporates? It might sound like a sweeping generalisation, but we believe most EM companies are relatively insulated from the brouhaha around global geopolitics. Indeed, any setbacks are usually related to market sentiment rather than company fundamentals. That’s why we think focusing on the latter, while remaining mindful of the former, is the best long-term investment strategy.

Our Emerging Markets Monthly Insights are brought to you by our Equities and Fixed Income investment teams and their emerging markets experts. This is a core strategy within our public-markets offerings.

Companies are selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance. All company stats taken for full-year results.