How does the performance of Mexico’s economy look?
The current account deficit is not as bad as one might think. We have about a 3% current account deficit, which is not too bad compared to many other EMs. The deficit’s recent performance comes mainly as a result of oil prices.
As fuel imports have increased over the past few years, Pemex’s production has been reduced. As a result, the oil contribution to the balance has shrunk, leading to the deficit’s widening.
In the long term however, not only because of Pemex, but also potentially due to the fact that energy reforms will soon pick up soon, the gap could close again. Oil aside, the remainder is down to manufacturing exports, which are currently performing well and have a positive outlook.
If we look at the composition of imports, many capital goods are being imported for manufacturing purposes later on.
How does the current investment climate look in Mexico?
There has been some concern in the short-term outlook regarding fallout from the US political race, especially concerning the possible reversal of the NAFTA agreement.
Personally, I believe that NAFTA will not be as vulnerable to reversal as the markets are anticipating. Even if certain candidates would want to reverse the agreement, it is unlikely that it would be feasible as the economic relationship between the US and Mexico goes much further than politics. Overall I believe that the results will be more benign than many are expecting.
We are also seeing potential difficulties arising from protests regarding education reforms in Mexico. However, again I believe that this is more of a political agenda, particularly on the part of more radical groups within the country, and that it is not something that is likely to cause significant concern to investors.
In which sectors are you seeing the best opportunities to invest? In which sectors is there too much risk?
Mexico is very competitive in some of the major manufacturing areas, particularly those related to the automobile, electronics, machinery construction and computing sectors. We have been able to develop a more competitive platform within these areas.
In the tourism and infrastructure sectors there is also a huge demand for activity. Furthermore, the implementation of the energy reforms is very positive. This is particularly constructive not only for the oil but also for the gas industry, as the construction of pipelines in Mexico for receiving US gas provides a huge opportunity to invest in the country.
In addition there will be opportunities to invest in electricity infrastructure, which will benefit from the combined reform of energy producing sectors such as oil and gas. This is not a short-term expansion, so we will see opportunities for investing for many years to come, which could amount to almost a decade of expansion.
How does leverage look across the various sectors? To what extent is leverage across certain corporates a concern?
Leverage is not particularly bad in Mexico. On the corporate side, companies in the country are in general very well balanced, and many entities are conservatively managed.
On the government side, the percentage of debt to GDP has increased to around 48%. This is not an insignificant number, and the government will likely have to reduce this level of debt a little to feel more comfortable with such a burden. Overall, I am a little more concerned with government debt than I am with corporate debt.
How do dollar and peso investment opportunities compare?
The peso trades on its own, as most investors use the peso as a market hedge for many things; people have been hedging the peso against Brexit, the Turkish coup, Brazilian scandals and against noise from the US elections.
The peso is effectively picking up global risks, and could even be used to cover any risks emerging from China. As a result, the currency is heavily undervalued. This means there is an opportunity to materialise the gains that can be made between the Mexican peso and the rest of EM which should not be overlooked.
However, in the long-run there will be a lot of volatility, and every time either a border wall or tearing up of the NAFTA agreement is mentioned in politics elsewhere the peso will suffer.
Despite this, the reversal of NAFTA in particular is unlikely to happen. 70% of exporting companies in Mexico are US companies, such as Ford or General Motors.
The complement of Mexican exports towards US manufacturing amounts to 41%. This means that for every single item that we export to the US, 41 cents for each dollar is built in the US.
The integration between Mexican exports and US manufacturing is therefore huge. As a result the peso is a strong currency to take a long position on, from 5 years upwards.
To what extent does peso volatility weigh on investment decisions?
Investors are slightly anxious or frustrated because the Mexican peso has been underperforming for quite some time. In the long-term however the Mexican peso is likely to provide some significant opportunities for investors.
How do investments in Mexico compare to elsewhere across Latin America?
Mexico exports more manufacturing than the whole of the rest of Latin America combined, including Brazil. The country is ahead of others in the region in terms of competitiveness, infrastructure and unit labour cost amongst other factors.
Mexico does lag behind other countries on certain issues, but overall there is not too significant a difference. Brazil’s economy is much more closed and in Colombia government expenditure requirements for infrastructure are much higher than in Mexico in both the short and long-term.
What advice would you have for anyone looking to invest within Mexico?
Investors need to be aware of a few things when investing in Mexico.
The fiscal agenda is moving in the right direction in reducing the fiscal deficit and in not trying to increase the level of debt. The government needs to maintain discipline regarding the fiscal adjustment related to the impact of lower revenues from Pemex.
Whilst all this is positive and the government is moving in the right direction, investors need to make sure that these factors continue to head in the right direction.
There has been a huge change in the corruption agenda in Mexico which investors should take note of. Earlier this month there was the approval of corruption reforms in congress, which is a huge step for a country such as Mexico.
More often than not, reforms will not have a large short-term impact, but are likely to have a significant effect in the long term. The corruption reforms were pushed for by the private sector, which is a good sign of things to come.
Investors should also pay attention to the production output of Pemex and the development of the current account, as well as how the implementation of the energy reforms goes. If these are positive then we are moving in the right direction.