Mexico’s Rise as a Global Power

Since the global recession, Mexico has been making its voice heard at the global level. And it should be since Mexico is now the 15th largest economy in the world, 2nd largest trading partner with the United States, 12th largest global exporter and a poster child for how other commodity export-dependent peers can transition to an internally-fueled economy through structural reform aimed at bolstering sustainable consumer demand. Recall Mexico of the early 1990s, going through the same privatization fury we saw in the former Soviet Union, Eastern Europe and China – and yet Mexico’s story stands out for several reasons.

First, in the 1980s, oil exports were approximately 80% of USD income; today, oil represents only 20% of USD income with export manufacturing representing the largest source of USD income, just ahead of foreign remittances. What this means is the government budget no longer lives and dies by the price of oil but by Mexico’s strategic position as a value-add exporter of manufactured goods. This evolution, made more robust by the rise of the middle class consumer, makes Mexico one of the most important global trade partners and a major beneficiary of foreign direct investment.

Second, over the last 25 years, Mexico has successfully transitioned away from the single party political system, marked by graft, back room deal-making and a heavy-handed regulatory environment. That said, while it’s certainly easier to do business today in Mexico, they still have a lot to do to make business investment easier. Note: avoid getting dragged into court if doing business in Mexico. Its Napoleonic legal system is not fun and unless your claim is physically documented, notarized and witnessed by the Ave Maria, you may find yourself sucking wind on the short end of a contractual good faith agreement. Intent matters little; paper rules. So no, an email isn’t going to make your case in court.

Third – and this is the theme we’ve really watched over the last few years – Mexico is becoming a bona fide global player in both foreign affairs and trade. Many don’t realize that Mexico is an extremely key member of OAS, the 10th largest country measured by contributions to the UN’s annual operating budget and under Claudia Ruiz Massieu, Mexico’s visibility on the global stage has only increased (Fact: Mexico has 80 embassies and almost 200 consulates around the world). So, this from Dow Jones this morning, reminds us that Mexico’s growing role on the global stage should be seen from two perspectives: First, Mexico, like all countries, seeks to promote its own interests. That is a given, but, second, Mexico appears more and more to be carrying water for US foreign policy when it makes sense. Dragging what remains of OPEC into the 21st century strikes us as one of those policy objectives that suits Mexico’s unique position well.

“Dow Jones: Mexico Energy Min Says “Just Coming for Informal Conversations” with OPEC, Non-OPEC Representatives in Istanbul

Wed Oct 12 06:37:23 2016 EDT”

No, it’s not the first time that Mexico has attended an OPEC meeting but given all that has transpired, it surprises us little that Mexico pops up for “informal conversations” with OPEC members as world focus on crude supply remains – let’s say – intense.


Barrons – Aug 2016

Reprinted from Barron’s

3 Brazil Headlines: Temer Fingered, Petrobras Sales, REITs Attractive?

The iShares MSCI Brazil Capped exchange-traded fund (EWZ) is up nearly 2% today, pushing the fund’s weekly performance well ahead of the 1% decline in the iShares MSCI Emerging Markets ETF (EEM).

Some of the headlines coming from Brazil:

Brazil’s interim President Michel Temer denied allegations that he had a part in a graft scheme at state oil company Petroleo Brasileiro or Petrobras (PBR), the country’s biggest ever corruption scandal. Petrobras shares are up more than 2% this week. The Wall Street Journal in a story today writes:

” … Temer denied the claims made in plea-bargain testimony by Sergio Machado, former head of Petrobras Transporte, or Transpetro, a fuel-transportation and logistics subsidiary. Mr. Machado has testified that in 2012 he organized, at Mr. Temer’s request, a donation of 1.5 million reais (about $432,000) from a construction firm to Mr. Temer’s political party, in exchange for Transpetro contracts. Mr. Temer dismissed the accusations as “frivolousness”… “irresponsible lies” …But the sweeping charges laid out by Mr. Machado may not be quickly or easily dispelled. They implicate some two-dozen politicians from seven different political parties …”

Meanwhile analysts project that Brazil officials will impeach President Dilma Rousseff by mid-August.

Petrobras, Brazil’s state-run oil company, received bids for a stake in its fuels-retailing unit BR Distribuidora in recent days, chief executive Pedro Parente said in his first television interview since taking the helm June 1, according to Reuters. He is trying to speed up the sale of assets — $14 billion in hoped-for divestments of oilfields, processing and distribution systems, power plants and other operations — to cut its $130 billion debt. See the Reuters story, Petrobras received bids for unit in recent days, CEO

Tierra Funds Jamie Anderson said in a prepared release that the U.S. Federal Reserve’s decision to delay an increase in interest rates provides “much needed breathing room” for emerging markets, especially China and Brazil. Tierra is  promoting a so-far small and illiquidfund it launched in December, the Tierra XP Latin America Real Estate ETF (LARE), which is focused on Brazil and Mexico real estate. Anderson the writes:

“Brazil’s central bank released its minutes Wednesday from its latest policy meeting and noted, among other things, that rate cuts will be on hold a little bit longer as inflation is still well above target levels. That said, year on year CPI has fallen from roughly 10.5% to 9.6% and the central bank believes we should see moderately lower CPI as we get into the summer season. We continue to view risk-adjusted yields from Brazil REITs as quite attractive and have noted above-average trading volume on many non-REIT real estate equities lately, which to us suggests that investors are positioning for what many expect to be a constructive second half of the year.”

The Tierra real estate ETF is up 16% this year, in line with the much larger and more diversified iShares Latin America 40 ETF (ILF).

CNBC Europe – Aug 2016

Olympics beset by inconveniences, not disasters

CNBC Europe – Jun 2016

Why Donald Trump’s border wall won’t work

CNBC Europe – May 2016

Brazil investors must think long term: Tierra Funds