James Syme

Senior Fund Manager, JOHCM

The right time to revisit Mexico

Mexico is an equity market that in recent years has generally been one of the less volatile emerging markets. Mexico is an OECD member with relatively stable politics, a highly regarded central bank and limited presence in the more cyclical commodity sectors of the stock market, all of which tend to dampen swings in equity prices.

However, the last year has been very different. The election of Donald Trump after primary and presidential campaigns during which he repeatedly criticised the North American Free Trade Agreement (NAFTA), Mexico and even the Mexican people, has had a dramatic impact on both the currency and the equity market, with the MSCI Mexico Index down 13.1% in US dollar terms in November 2016. In 2016, Mexico exported a total of US$374 billion of goods – US$303 billion of which went to the US (with a further US$10 billion to Canada, also under NAFTA). In addition, Mexico is a substantial beneficiary of tourist visitors, worker remittances and foreign direct investment flows from the US, so a collapse in US-Mexican trade relations would be disastrous for the southern partner.

The fall in Mexican capital markets was intensified by rising US bond yields, driven higher by both the US recovery and expectations that the Trump administration’s reflationary policy agenda would push structural inflation higher in the US.

Finally, there was increasing concern that Mexico’s 2018 presidential election might return a nationalist populist, Andrés Manuel López Obrador (‘AMLO’), which would be a clear negative for both the Mexican economy and corporate Mexico and give rise to further risks to its relationship with the US.

Softening the rhetoric on NAFTA

Six months on, these risks have largely (but not completely) passed. The Trump administration has not been able to move its legislative agenda forward with any real success. US Trade Representative, Robert Lighthizer, sent a formal notification to the US Congress saying he intended to renegotiate NAFTA, but the language used speaks more to modernisation and updating than to terminating it. To be clear, there are still risks the talks could break down, or that the US administration could return to demonising Mexico.

Meanwhile, US bond yields have retraced about half their post-election move, as US fiscal stimulus has been delayed and inflation remains stubbornly low, which eases the pressure on emerging market currencies. The domestic Mexican political situation remains fluid, but victory for the ruling PRI party in the gubernatorial election in the key State of Mexico shows opposition to AMLO will be robust. 

“Growth should remain positive this year”

 James Syme, Portfolio Manager, BT Wholesale Global Emerging Markets Opportunities Fund

Mexico is still working through the inflationary impact of the currency sell-off in 2016, with Banxico having hiked policy rates three times this year, following six hikes in 2016. The move in policy rates from 3.0% to 6.75% will be a drag on the economy, but growth should remain positive this year. Mexican equities have historically been one of the most defensive in economic downturns. However, they have significantly de-rated, with the premium Mexican assets attract over other emerging markets coming back to their long-term average.

Accordingly, we have moved our weighting in Mexico from zero towards a neutral position. Our preference is for high-quality, domestic demand-focused companies with strong growth prospects. We have added Walmart de Mexico, the largest retailer in the country, and Megacable, a cable-based media company benefiting from growth in TV and internet consumption in Mexico.