NEW YORK, April 7 (Reuters) - Foreign exchange strategists expect the Mexican peso to retreat over the next six months, but many fund managers remain bullish, saying the currency is undervalued.
Mexico's currency was the world's strongest in the weeks following the inauguration of U.S. President Donald Trump - whose anti-trade rhetoric initially hammered the peso - gaining more than 17 percent.
Many investors are betting there is more to come from Mexico's Trump rally, shrugging off forecasts by economists and foreign exchange analysts polled by Reuters that the peso could depreciate to 20 pesos per dollar by late September from its current level of 18.77.
Kathleen Gaffney, co-director of diversified fixed income at Eaton Vance, is increasingly confident that Trump will not follow through on his protectionist campaign promises. She expects the peso to surge by double digits over the next two years.
"Mexico benefits primarily from stronger global growth, and the market beginning to factor in that there will be less impact on U.S. trade with Mexico," Gaffney said. "Global trade is picking up and Mexico is really part of the global manufacturing network."
The roughly $500 million Eaton Vance Multisector Income Fund has about 4.5 percent of its assets in Mexican bonds, with the position consisting mainly of 30-year peso-denominated Mexican government debt.
Gaffney is not alone. All 15 portfolio managers interviewed by Reuters in recent days said they view the peso as undervalued, although just two said they have actually added to their positions in recent months.
Jim Barrineau, portfolio manager and head of emerging markets debt for Schroders, said the peso "is still grossly undervalued" against the dollar even when taking into account the inflation differential between the two countries.
He and other fund managers say Mexico's independent central bank, strong financial institutions and the fact that its economy still looks set to grow this year despite recent struggles make Mexican assets attractive.
They also cite the Trump administration's recently more conciliatory tone toward the country amid struggles to enact other parts of its agenda, like health care and tax reform.
Robert H. Neithart, a fixed-income portfolio manager at Capital Group who oversees approximately $79 billion of assets, said he has gradually increased his Mexican asset exposure based on the "combination of valuation and seemingly less-hostile trade talks" with the United States.
But not all Mexican assets are fairly priced, cautions T. Rowe Price's Verena Wachnitz, who manages $1.2 billion and oversees the firm's Latin America equity fund. While the peso seems cheap, valuations for Mexican stocks are not.
After the U.S. election, "what happened is that the currency sold off quickly and sharply but stock prices had only a modest negative reaction, and still looked expensive on average despite increased uncertainty," Wachnitz said.
Similarly, Patricia Ribeiro, emerging markets equity portfolio manager at American Century Investments, with $1.5 billion under management, has been reducing her holdings of Mexican stocks over the past six months, citing lingering concern about U.S.-Mexico ties and the country's domestic growth prospects.
"Because we are seeing a deceleration in GDP, interest rates going up, inflation picking up, it's harder to find stocks," she said.
Still, hedge funds and other speculators have been betting the peso has more room to run. Long speculative contracts on the currency reached the highest level since September 2014 last week, according to the Commodity Futures Trading Commission.
Some portfolio managers are banking on the peso's relative cheapness as an opportunity to invest in Mexican hotel operators and Mexican airport holding companies. Others favor Mexican cement maker Cemex, as well as debt issued by auto parts suppliers like Nemak.
Jamie Anderson, managing principal of Tierra Funds, said Mexico has been the prime contributor to the 21 percent gain in its XP Latin America Real Estate ETF this year. He believes the peso could gain "easily another 5 percent."
"Underneath all of this is the Mexican consumer, and at the core this is a Mexican consumer growth story and that makes it a very attractive destination," Anderson said.
"I had a hunch that the (recovery in) the Mexican peso was going to be fairly swift and unrelenting when it did kick into high gear. The question now is, how much further can it really go?" (Additional reporting by Sam Forgione; Editing by Christian Plumb and Dan Grebler)