By Marc Jones
LONDON (Reuters) - Investment bank Morgan Stanley issued an "underweight" warning on Mexican shares on Wednesday due to concerns about planned changes to the judiciary and electoral system, and also downgraded forecasts for China's main markets.
The effective "sell" recommendation on Mexico comes as outgoing president Andres Manuel Lopez Obrador looks to push through a bevy of constitutional reforms with the help of his soon-to-be successor Claudia Sheinbaum.
The most controversial is judicial reform, which aims at having a new system where all judges — including Supreme Court magistrates — would be elected by popular vote. It is a set-up that Morgan Stanley and others warn risks synchronizing the judiciary with the political cycle.
"We downgrade Mexican equities to an underweight stance," the bank's analysts said in a note citing the concerns.
"These changes may also increase uncertainty about the capital expenditure outlook amid bottlenecks in near-shoring capacity," they added, referring to the ability of firms to move to, or scale up their operations in Mexico, rather than in countries such as China.
China's equity market targets were also lowered to reflect the latest economic fundamentals, as well as "fund flow and positioning, market sentiment (and) ... the global geopolitical environment".
The new targets for June 2025 were set at 56 points for MSCI China, compared with 56.7 on Wednesday, 17,000 for the Hang Seng vs 17,391 currently, and 3,500 for the CSI300, which is now at 3,321 points.
"China's macro (economic) growth had started to trend below target on both real GDP and inflation/deflation recently, especially since July," Morgan Stanley's report said.
"Even with some additional policy easing pass-through, which could lead to a modest growth upturn in 4Q, our economics team still thinks full-year growth may still miss the 5% target."