Disappointing GDP numbers and a stagnant economy. An unpopular president with an administration tainted by scandal. Highly anticipated energy sector reform that started out with a bang, then fizzled. And yet most investors consider Mexico to be one of the brightest spots in Latin America. Why?
Jim Carlen, portfolio manager Columbia Threadneedle Investments’ Columbia Emerging Markets Bond Strategy:
Every politician faces problems and Mexico’s Enrique Pena-Nieto is no exception. But despite the political noise, Mexico generally has its policies in order, said Jim Carlen, portfolio manager of Columbia Threadneedle Investments’ Columbia Emerging Markets Bond Strategy.
The country’s strong institutions and sound policies with respect to the budget, as well as Mexico’s proximity to the U.S. will help in dealing with the headwinds it is currently facing, notably its economic troubles.
Like most other emerging market nations, Mexico has had to contend with the fact “that though there’s been faster growth in the G-10 countries in the last couple of years, there’s also been less demand for exports from emerging markets,” Carlen said. The relatively tame domestic growth in emerging markets including Mexico and softer commodity prices are also headwinds to economic growth.
Mexico, though, is better positioned than other emerging market countries to come out strong, he said. Carlen also believes that energy sector reform will improve going forward and western oil companies will be offered better terms when bidding in Mexico.
“I would say that the first auction was a hiccup and Mexico will learn going forward,” Carlen said. “The world is also now awash in oil and that was an un unanticipated bump n the road for Mexico but long-term, the goal is definitely to get Western firms and their technology more involved in the Mexican oil sector and to make energy cheaper, and they will succeed in doing this.”
Jim Barrineau, Co-Head of Emerging Markets Debt Relative, Schroders Investment Management:
When growth slows in a country, the political noise immediately increases, but Jim Barrineau, co-head of emerging markets debt relative at Schroders Investment Management, is not worried about Mexican politics.
Nor does he have too many concerns about economic growth, which albeit slated to fall further in 2016, should still come through in a fairly sound position.
“Growth is slowing, that’s true, and inflation, while okay, is not super low in Mexico,” Barrineau said. “But Mexico is technocratically proficient—they have done a great job in managing the peso and I think the energy policy will be great long-term. The Mexicans understand what they did wrong in the first auction and they will be more market friendly in the second auction. Eventually, the fields that can produce at low cost will bring in FDI of $5 billions to $10 billion a year and that will really help Mexico on the macro side.”
The one sticky point—in the near-term, particularly—is Mexico’s proximity to the U.S., which does help, of course, but also means that its local debt market is extremely correlated with the Federal Reserve. It’s quite likely that if and when the Fed raises rates, Mexico will too, Barrineau said, and “even a benign rate hike won’t be easy for Mexico.”
Barrineau currently holds the bonds of Mexican oil giant PEMEX, which, he says, are cheap.
Anthony Cragg, portfolio manager of the Wells Fargo Advantage Emerging Markets Equity Fund:
“We are positive on Mexico, which is a large contributor to the fund, and have been for quite some time,” said Anthony Cragg, portfolio manager of the Wells Fargo Advantage Emerging Markets Equity Fund.
Latin America, Cragg said, has been in the doldrums and Brazil, Argentina, the Andean countries, have all been hit hard by the commodity downturn. Mexico, though, stands out “as a better property in a struggling neighborhood,” he said.
“While a 2% growth rate doesn’t sound great, Mexico is hugely outperforming the region and it’s by the far the best place to be in Latin America.” Mexico benefits from its proximity to the U.S. and as such, it’s “one of the most direct plays on the U.S. economy,” Cragg said, in three ways: Outsourcing for the automobile industry; remittances sent home by Mexican workers in the U.S. and travel.
“Some of our biggest holdings have been Mexican airports,” he said. “As the U.S. economy has become stronger, tourists arrivals into Mexico from the U.S. have also been strong and airports offer some pretty attractive yields.”
Cragg also believes that energy sector reform will become more concrete in Mexico going forward. Mexico needs to produce more energy, he said, and has considerable reserves in the Gulf of Mexico for which it needs private sector and overseas investment.