Brazil and Mexico, included in our balanced and dynamic portfolios, have emerged as leading performers since the beginning of 2026. Their performance stands out within our investment universe and reflects underlying structural factors that may persist.
Oil exposure as a support factor
Geopolitical tensions typically drive oil prices higher, strengthen the dollar and fuel inflation. In the past, such dynamics were negative for Latin American economies.
Today, the opposite applies. Brazil and Mexico have delivered returns of approximately 22% and 13% respectively since the start of the year (including dividends, in euro terms).
Their position as oil producers is a key element. While Mexico faces declining production that requires investment, Brazil continues to expand output and strengthen its global role. Rising oil prices, therefore, support, rather than weaken, these economies.
Structural shift in debt composition
A notable change has been the move away from dollar-denominated debt. Both countries previously relied on USD borrowing, exposing them to exchange rate volatility.
This exposure has been significantly reduced. Brazil now issues almost all sovereign debt in local currency, while Mexico does so for roughly 80% of its debt. This reduces currency risk and increases fiscal accountability, as market discipline is more immediate.
At the same time, governance frameworks have improved, with stronger fiscal discipline, more independent central banks and enhanced credibility in inflation management.
Gradual easing of financial constraints
Growth remained limited at around 1.8% by the end of 2025, reflecting restrictive financial conditions. Central banks responded to inflation with high policy rates.
Brazil's Selic rate reached 15% before declining to 14.75% in early 2026, while Mexico's policy rate fell to 6.75% after a period at higher levels. These developments suggest a gradual normalisation of financial conditions.
Brazil's improving outlook
Brazil enters this phase with supportive domestic fundamentals. Low unemployment, rising real wages and stronger consumer sentiment point to improving demand conditions. Combined with lower borrowing costs, this supports a potential recovery in activity.
Additionally, Brazil's large reserves of rare earths strengthen its strategic position amid global competition for critical resources.
Mexico's dependence on US developments
Mexico remains closely linked to US economic and political developments. While nearshoring continues to support industrial activity, trade measures introduced in 2025 affected key sectors such as automotive.
The 2026 revision of the USMCA agreement introduces further uncertainty, particularly in the United States' electoral context.
Despite these risks, domestic demand remains solid. Following modest growth in 2025, economic activity is expected to improve as credit conditions ease and investment resumes.
Shifting investor perception
Brazil and Mexico now appear less vulnerable to traditional external shocks, supported by structural improvements and stronger policy frameworks.
In the current environment, they represent relatively stable components within global portfolios. Both markets account for 5% of our balanced and dynamic allocations, as shown in our asset allocation strategy.