Mexico’s AMLO pushes ahead with judicial reform. Here’s why more bad news could be coming for stocks.

AMLO is leveraging the supermajority the Morena Party won in June, using the time between the swearing-in of Congress this month and Sheinbaum’s inauguration in October to push through a series of changes he couldn’t do earlier in his term because he lacked a supermajority. Sheinbaum has backed judicial reform as a tool to fight corruption, telling investors they have nothing to worry about.

The

iShares MSCI Mexico

exchange-traded fund rose 1.8% to $51.95 in recent trading, but is down 24% year-on-year. In a note to clients, Kimberley Sperrfechter, emerging markets economist at Capital Economics, warned that even with some bad news in the market, more risk-takers are on the horizon.

There are about 20 constitutional amendments pending in Congress, mostly around reforms to overhaul the welfare system and strengthen social security, which could include mandatory minimum wage increases to keep pace with inflation and free universal health care in the constitution. These reforms threaten the economy, potentially entrenching inflation and taking a toll on Mexico’s fiscal health at a time when its finances are already strained, Sperrfechter writes.

But the most controversial reforms carry institutional risks, including those targeting the judicial and electoral systems, with measures to elect judges, even in the Supreme Court, by popular vote, reduce the size of Congress and abolish proportional representation, which would favour larger parties such as Morena.

“This risks reducing government checks and balances in a country where there is already widespread corruption and political interference from drug cartels,” Jon Harrison, managing director of emerging markets macro strategy at TS Lombard, said via email.

Together with other proposals aimed at weakening the autonomy of regulatory agencies, Sperrfecther said this raises concerns about the loss of democracy and the business climate in Mexico.

That raises big questions about the positive case for Mexico, which has been drawing investors to the country in recent years as foreign direct investment has flowed in. Mexico has become a destination for companies looking to diversify their supply chains away from China, or “nearshoring.”

According to Harrison, some companies were already delaying investments before AMLO’s latest attempt due to issues with access to sufficient power and water for their facilities, questions about the upcoming U.S. election and possible tariffs, and a more difficult relationship in a new Trump term.

Regardless of who wins the U.S. election, Mexico — and the U.S.-Mexico-Canada Agreement, up for renewal in 2026 — will receive increasing attention in Washington as Chinese companies have flocked to Mexico to set up production and circumvent mounting trade restrictions.

Analysts expect both sides to take a closer look at so-called rules of origin to close these loopholes, raising the potential for tensions between the two neighbors.

The latest moves in Mexico only add to that. “Sheinbaum, as AMLO’s protégé, will not change course. The US needs to figure out how to provide ‘safety’ for businesses in the new Mexican political environment,” said Abishur Prakash, CEO of Toronto-based consultancy Geopolitical Business.

Despite the 13% drop in Mexican equities since the election, Sperrfechter sees the potential for more pressure on both the market and the peso. By comparison, she says the risk premium on Mexican assets is still smaller than other periods of politically oriented stress from AMLO policies.

Developments in Mexico could also remind international investors that elections matter, especially as both parties in the country’s northern neighbor push populist proposals and concerns mount over the electoral and judicial systems.

Write to Reshma Kapadia at [email protected]