Deteriorating trade deal talks is a major downside risk for Mexican stocks, according to a top Wall Street firm.
Government officials from the U.S., Canada and Mexico announced last week the North American Free Trade Agreement (NAFTA) renegotiation talks will go into next year due to "challenges" in reworking the trade deal. NAFTA took effect in 1994 to lower trade barriers among the three countries.
JPMorgan derivatives strategist Shawn Quigg told investors to bet against Mexican shares Monday especially after the market's strong run so far this year.
The iShares MSCI Mexico Capped ETF (EWW) is up 18 percent year to date through Friday versus the S&P 500's 15 percent return.
"NAFTA renegotiation talks have taken a turn for the worse, and the launch of the political cycle is quickly approaching. … NAFTA renegotiations appear at an inflection point as many of the issues presented by the White House are being outright rejected by both Mexican and Canadian authorities," Quigg wrote in a note entitled "Mexico: Cheap Volatility & Approaching Confluence of Potentially Highly Negative Events - Buy EWW Puts."
The strategist said the firm's Mexico equity strategist Nur Cristiani is concerned "chances of a 'worst case' or no-deal scenario have significantly increased."
JPMorgan's team is worried over the timing of the talks into Mexico's presidential election next year. The fifth round of trade talks will be conducted Nov. 17 to 21.
"This leaves little time for Mexican authorities to renegotiate before political campaigns officially begin in March," he wrote. "It is important for Mexico to have an agreement in place prior to the 2018 presidential elections to avoid NAFTA becoming a political tool."
Quigg recommends buying January 2018 iShares MSCI Mexico Capped ETF $51 strike put options.