Investing In Mexico In The Trump Era
There’s been a lot of talk lately about Mexico. But whether you favor or oppose a border wall, the North American Free Trade Agreement (NAFTA) or immigration reform, the prospects for Mexican securities markets remain similarly debatable.
“Donald Trump’s protectionist stance is among Mexico’s biggest concerns,” says Peter Taylor, London-based manager of the Emerging Markets Equities Fund at Aberdeen Asset Management. “Nonetheless, Mexico is home to a range of attractive companies that are well run, are decently priced, and boast solid balance sheets.” Taylor cites Grupo Aeroportuario del Sureste, known as ASUR, an airport operator headquartered in Mexico City, and Fomento Económico Mexicano, or FEMSA, a Monterrey-based beverage supplier and Coca-Cola bottler as two companies he likes.
The effect of President Trump’s election can’t be denied. Last year, the Mexican Bolsa index rose more than 11% through the U.S. election, then abruptly pulled back. By year’s end, the benchmark had returned only about 5% for the year, underperforming the Standard & Poor’s 500 by some 4.5 percentage points.
“We’re looking at a much different picture now regarding Mexico,” says Geoffrey Pazzanese, a vice president and senior portfolio manager at Federated Investors in Pittsburgh who is responsible for the firm’s Emerging Markets Equity Fund and InterContinental Fund. “Within Mexico, we’ve seen a booming industrial economy in terms of construction and building. There’s been big growth in consumer spending. But now, with the potential border tax and the potential wall and so forth, Mexico has a lot of things stacked up against it, at least in terms of the rhetoric. So we’ve removed some weight from the consumer names, though we’re sticking with tourism-related stocks, such as airports and some resorts.”
Week Peso Versus Strong Dollar
One reason for being bullish on tourism into Latin America’s second-largest economy is that local goods and services are relatively cheap. The peso has fallen from about 17 to the dollar at the start of 2016 to nearly 21 at the start of this year. So U.S. travelers’ dollars go farther.
How long that will last, and how far the peso will fall, is anyone’s guess. “The peso is significantly undervalued,” says Anujeet Sareen, portfolio manager at Brandywine Global Investment Management in Philadelphia. “From here, we think the Mexican peso is more likely to strengthen over a medium-term horizon.”
President Trump, he says, is “unlikely to deliver on the most pessimistic outcomes on trade policy, and therefore the Mexican peso is more likely to strengthen as the administration clarifies its policies.”
The Bond Market
Sareen also has a positive view of Mexican fixed-income securities, dubbing them “some of the most undervalued securities in the global fixed-income universe.” He points to the 30-year sovereign bond, which is yielding more than 8% while Mexican inflation is just above 3%. “So Mexican bonds currently offer a very generous 4% excess premium over inflation,” he says. “It is exceptionally difficult to find bond markets globally that offer such attractive inflation-adjusted yields, particularly given the relatively high credit rating of Mexico versus other similarly yielding emerging-market countries.”
All that could change, however. Luis Maizel, co-founder and senior managing director of LM Capital Group in San Diego, notes that the Mexican economy has been hurt not just by Trump’s tough talk but by “the rapidly declining popularity of [Mexican] President Enrique Peña Nieto, amidst growing corruption and renewed crime growth,” he says.
Yet in general, Maizel acknowledges, “fixed income still looks solid.” He attributes a degree of volatility to irrational fear rather than “a decline in the expectation of the obligations being paid back,” he says. “Good fundamentals remain in place.”
Still others are only mildly worried about a negative Trump effect. “Most of the drawdowns over the past year are the result of [Trump’s] comments or campaign promises and the uncertainty and momentum that they have created,” says Christopher McKee, chief executive of the PRS Group/Gavea Emerging Markets Corp., an East Syracuse, N.Y.-based quant shop specializing in political and country risk forecasts. “However, given the nature of the U.S. economy and the kinds of checks and balances that are in place, we suspect much of the campaign rhetoric that does result in policy will be diluted.”
On the other hand, he adds, if Trump delivers on promises to strengthen American infrastructure, that could be a boon for certain Mexican multinationals such as cement giant Cemex.
Bargain investors insist there are other good opportunities among Mexican stocks. Gerardo Zamorano, who co-manages the Brandes Emerging Markets Value Fund, was born in Mexico and is now based in San Diego, is increasing his exposure to Mexican real estate investment trusts (REITs), known as Fideicomiso de Infraestructura y Bienes Raíces (Fibras).
“As recent rhetoric against Mexico escalated, REITs with manufacturing tenants have sold down, and the market seems to be anticipating more will shut down,” says Zamorano. “This makes for some good opportunities, particularly with the REITs that have clients who are paying rent in dollars, not pesos.”
He declines to identify specific stocks, and acknowledges a degree of uncertainty ahead. “I’d expect volatility in the short term, but if you invest in Mexico this year you’re likely to have a good return in the next three to five years,” he says.
A similar sentiment is echoed by Jamie Anderson, managing principal at Summit, N.J.-headquartered Tierra Funds. A period of uncertainty, he says, is “precisely the time you want to invest capital.”
Anderson, too, singles out Mexican real estate opportunities. “Real estate is expected to grow its top-line revenue across the region, especially in Mexico,” he says. It is, he goes on, “uniquely attractive given the combination of stable high yield and organic growth potential.”
A Degree of Caution
Still, caution is in the wind. “Revamping NAFTA could really take a wrecking ball to the Northern Mexican economy,” says Charles Sizemore, a portfolio manager on Covestor, the online investing company, and principal of Sizemore Capital Management in Dallas.
He contends that the border security issue is “mostly a distraction,” but the uncertainty about what’s to come is what’s been most damaging to Mexico’s currency and equity market. “The issue right now is that we simply don’t know what the changes to NAFTA, if any, will look like,” he says.
The extent to which Mexican companies are NAFTA-dependent may be overstated. “They have many other trade agreements,” points out Crit Thomas, global market strategist for Cincinnati-based Touchstone Investments. “For instance, Mexico basically has access to about half the global car market. It does export a lot to the U.S., but there’s also a lot of production that’s not going to the U.S., which gives Mexico a little bit of a buffer.”
Thomas adds that trade barriers won’t change the advantages of low labor costs there, either. “So there are some factors in Mexico that are positive,” he allows.
One area under particular scrutiny is Mexico’s energy sector. In 2014, the government broke up the state-controlled power monopolies, Petroleos Mexicanos (Pemex) and Comision Federal de Electricidad (CFE). But opening up the space to private enterprise has proved tricky.
“It seems there could be a plethora of new opportunities for organizations, and hence investors, to benefit from this deregulation,” says Clayton Fresk, a portfolio manager with Stadion Money Management in Watkinsville, Ga. “It also seems a potential strong tailwind for the country and its economy as a whole, so there could be a bit of the ‘rising tide lifts all ships’ scenario.”
But that’s far from certain. “Without government control over gas/oil prices, the cost of gasoline [in Mexico] has skyrocketed,” says Rob Ginsburg, president of Chicago-based RBG Global. This, in turn, has “a profound impact on the political economy of Mexico, where the average wage is $4 a day and the 60 cent increase [in gas prices] on the already struggling car owner can be catastrophic.”
Ginsburg says the repercussions “should drive [equity] prices down even further.”
Most observers agree on one thing: If you want to gauge the near-term future of Mexican markets, keep an eye on Washington. “Unfortunately, in the short term at least, the future valuation for these instruments will be directed from policy in Washington ahead of anything that is decided in Mexico City,” says Andrew Stanners, London-based manager of fixed-income investments at Aberdeen Asset Management. “Any tempering of the perceived anti-Mexican declarations … could present opportunities.”