Mexico has had it all in recent years, except its president.
Its factories are a top proximity destination for souring manufacturers in China. The pandemic recovery in the United States is helping the poorest Mexicans through remittances, which make up about 4% of gross domestic product, and the richest who cross the border to get vaccinated against Covid-19. Actual vaccination rates are probably higher than the official figure of 11%. Export revenues increase with oil prices.
The problem with this image, from an investor perspective, is President Andrés Manuel López Obrador. His slurs against the rich and his drive to quash state contracts from predecessors have depressed investment since his election in 2018, leaving the nation of 128 million people with near zero growth.
The markets therefore appreciated that AMLO, as the Mexican leader is called, lost ground in the midterm elections on June 6. The Morena presidential party lost its two-thirds majority in the lower house of Congress. This prevents him from restoring a state monopoly in the energy sector and other anti-capitalist measures that would require constitutional amendments.
iShares MSCI Mexico
exchange-traded funds (ticker: EWW) and the peso both gained around 3%. “I now feel much more comfortable with the other favorable winds,” said Malcolm Dorson, portfolio manager for Latin America at Mirae Asset Global Investments.
Mexican stocks have already gained 16% year-to-date, pushing them to historical average price / earnings multiples, said Daniel Gewehr, head of equity research at WHG, a Brazilian-based wealth manager. But it seems reasonable when the rest of the world is 20% more expensive than normal.
Mexico is a stable, oligopolistic market with few to no disruptive tech start-ups. “These are the same old suspects they were five or ten years ago,” says Verena Wachnitz, portfolio manager for Latin American equities at T. Rowe Price. This means that some of the former suspects may be disruptors themselves, Dorson argues. He’s bullish on the country’s biggest bank,
Grupo Financiero Banorte
(GFNORTEO.Mexico), which has a clear field as technology expands financial inclusion: Less than 30% of Mexicans have bank accounts and less than 4% hold mortgages.
Dorson also likes
Wal-Mart of Mexico
(WALMEX.Mexico), or Walmex, which is “like Walmart in the United States, but much more powerful”. With competition largely confined to family stores, Walmex may dominate grocery delivery, which it expects to triple in the next few years.
Mexican airports, which have underperformed the market but could rebound with the recovery in tourism, are a higher risk / reward game. The stars are
Grupo Aeroportuario del Sureste
(ASR), which serves the popular resorts of Cancun and Cozumel, and
Grupo Aeroportuario del Pacifico
(PAC), with ten airports around Mexico and the Caribbean. “Everything that has to do with travel always has legs,” says Wachnitz.
AMLO’s reverse highlights the contrast between Mexico and its Latin American rival, Brazil. Brazilian markets are larger and more dynamic, with a constant flow of technology-driven initial public offerings. Politics are also tumultuous – another polarizing presidential competition is slated for next year – and gratuitous state spending keeps the currency under pressure. The Brazilian real has lost a third of its value against the dollar over the past five years, compared to 4% against the peso.
Mexican election results improve the outlook for the peso by “lowering the chances that more populist policies will gain momentum,” said Emily Weis, global macro strategist at State Street.
This makes Mexico interesting as a different scavenging game.