How does the current investment climate in Mexico look?
There are a few headwinds coming from Mexico at present. First of all, there is a lot of discontent at present in the country. Although President Enrique Pena Nieto and his team had estimated that multiple reforms would boost annual GDP growth to ~5%, this year growth will actually be around 2.5%, which may rise to around 3% next year provided oil prices stabilize, US growth firms-up and the future US policy towards the country doesn’t change dramatically. There are a few reasons behind this.
Both public and private sector growth is not at the level that many would like. Furthermore, 80% of Mexican exports go to the US. Lukewarm US growth is weighing on the growth of its heavily dependent southern neighbour.
Some of the rhetoric in the US presidential campaign against Mexico, in particular related to free movement of goods and capital could, from our perspective, hurt the investment outlook on Mexico, independent of their potential implementation.
Furthermore, Mexico faces its own presidential election in 2018 and if the office is taken by a less business friendly candidate, investment to the country could again slow. Certain candidates vying for the presidency also want to reverse some of the reforms implemented by the current government, which would have an additional negative effect.
The perception that Mexico’s anti- corruption efforts have not been effective is also a potential future headwind for investment in Mexico. New anti-corruption measures which mandate Senate ratification of the head of the Public Administration Ministry ( Secretaria de la Funcion Publica - SFP), increase accountability and monitoring of government officials, and create an anti-graft prosecutor, among other measures, are aimed at addressing these issues and concerns. Corruption has already become a potentially key issue in 2018 presidential elections.
On a positive note, the significant devaluation of the peso means that remittances, which constitute a large source of income for Mexico, were up by around 4.75% in 2015 relative to 2014.
The weaker peso also makes Mexican exports to the US more competitive, and whilst any effect may not be felt for as long as the US economy remains sluggish, it nevertheless aids the Mexican exports.
Overall, despite concerns over the negative factors looming over Mexico, the country is still an attractive investment destination for foreign lenders, we believe. This is especially true in the long term when compared to certain other EMs, which have adjusted to the current global economic climate with crucial reforms aimed at maintaining and attracting foreign and private sector investment.
In the longer term, we believe Mexico will be a positive investment destination, but in the short and medium term the country does face headwinds.
In which sectors are you seeing opportunities to invest?
The business of Several Mexican companies that have sizeable exposure to the US consumer market but also benefit from a weaker MXN, should prove quite resilient, from our perspective.
Likewise, state owned entities that , we believe , have solid government backing despite lower prices for their goods (oil, for example), may provide attractive returns. Especially taking into consideration measures to cut costs and attract foreign investment.
Export focussed investors in Mexico, in particular, should enjoy a favourable investment environment on the competitiveness of Mexican exports due to the weaker peso.
How do dollar and peso investment opportunities compare in Mexico?
The significant devaluation of the Mexican peso, although bringing negative results, has also brought around some positive factors. The Mexican peso is very cheap and undervalued at present, meaning that there are investment opportunities within the local markets.
The problem with the peso however is that it is often used as a proxy to hedge against EM risk, so if there is a risk off environment across EMs, investors who cannot sell less liquid positions will hedge their risk by selling the Mexican peso.
From a dollar perspective, Mexican credit spreads could be vulnerable because of some of the above mentioned difficulties over the medium term, however if there is any significant widening of spreads we believe it would be a good opportunity to gain exposure to some of the better longer-term fixed income investments in the country.
To what extent does volatility in the peso weigh on investment decisions?
A weaker peso does make exports more attractive, which means it makes investments in the export sector more attractive.
We believe the country’s banking sector presents several interesting opportunities as Mexican banks are very prudently managed, and Mexico has one of the best regulated banking sectors in EM, from our perspective.
How does leverage look across the corporate space?
Leverage has to be considered on a company-by- company basis rather than a sector by sector basis. Domestically focused corporates will likely suffer across EMs due to varying degrees of FX exposure. Corporate default rates across EMs are likely, we believe, to reach 4 or 5% this year. In Mexico as well as most other EMs, we see lower commodity prices and company specific idiosyncratic issues as the main culprit behind defaults, as opposed to vulnerable FX positions.
How do Mexican corporates compare to other EM corporates, especially in Latin America?
Unlike in other EMs, Mexican Treasurers and CFOs, alongside their LatAm counterparts, have experienced significant political and economic volatility over the years, and have seen elevated inflation as well. They have been able to successfully manage their companies through all of this. Knowing that seemingly positive trends can reverse abruptly, they are generally quite conservative, and maintain significant liquidity on their balance sheets.
While comparing favourably to many EM peers, recent reforms to Mexico’s Insolvency Law implemented in 2014 will need to be tested further, from our perspective, in order for creditors to feel comfortable with their legal alternatives in the event of financial distress. Multiple amendments to the “Ley De Concursos Mercantiles” were enacted to address concerns about the ability of related partiers to influence restructuring proceedings, the implementation of Debtor in Possession (DIP) Financing as well as establishing more firm deadlines for the process, among other changes. While we see these modifications as positive, we believe they will need to be tested further to gauge their impact in addressing creditor concerns regarding their legal remedies in the country.
What advice would you have for anyone looking to invest within the corporate space in Mexico?
We believe Mexican corporates are some of the best managed entities within the LatAm EM space, and investors should be comfortable investing in the country. However, potential investors should be wary of certain sectors and of specific headwinds that could have an impact in the short and medium term.