The Mexican economy should pick up again following any US-led recovery next year, says Paul Wimborne...
The Mexican economy should pick up again following any US-led recovery next year, says Paul Wimborne, assistant manager on the Five Arrows Global Emerging Market Fund.
In recent years, Mexico's economy has grown steadily, its growth closely correlated with that of its American neighbour, which takes 85% of Mexico's exports. The 10-year boom in the US, coupled with stable government, has seen Mexican unemployment shrink to historic lows and salaries rise to new levels. However, the slowdown in the US has seen Mexico slip quickly into recession, with negative growth of 1% expected this year, Wimborne says.
'In Mexico, you've got a two-way play on the economy,' he explains. 'On the one hand, you have weak US industrial output that has led to a collapse in the demand for Mexican imports. On the other, the price of oil, one of Mexico's principal exports, has come down, which has had a major impact on the balance of payments.'
So far, the one plus point, Wimborne notes, has been the willingness of the Mexican consumer to keep spending despite recession. Inflation has undershot expectations by some margin, although the round of pay increases earlier this year had already factored this in, giving consumers more money to spend. The big question though is whether they will continue to do so until the US economy recovers, according to Wimborne.
He says: 'Mexico is our favourite country in Latin America, but we're neutral on it at the moment, remaining cautious in our approach. The one area we're keen on is the consumer sector ex-beverages. Beverages may suffer should the government manage to pass its fiscal reform package that proposes extending VAT to drinks among other things.'
John Payne, deputy head of emerging markets at Baring Asset Management (BAM), believes that significant foreign capital investment over the past year has also helped support the Mexican economy.
Payne says: 'This economic cycle has seen Argentina on the verge of default and concerns over Brazil. In contrast Mexico still looks attractive and foreign capital has been flooding into the country. The spread of Mexican bonds over US Treasuries has remained consistent, while the equity market remains reasonably good value, particularly the consumer sector.'
He is at pains to point out that while BAM is aggressively overweight on Mexico, with around 13% of its portfolio invested in Mexican equities compared to the MSCI benchmark guide of 9.6%, its approach is very stock specific. He likes Wal-Mex, the Mexican subsidiary of Wal-Mart, which he says has a strong balance sheet and growth profile, continuing to open stores even in a recession. 'We are also keen on America Movil, a Mexican mobile phone operator, which has very strong earnings growth and has healthy subscription figures. Although it is technically a telecommunications stock, it is really a consumer stock because of the nature of what it does.'
While acknowledging that consumer stocks are starting to come under some pressure and will continue to do so until the US recovers, Payne feels a lot of investors in this market are looking through the immediate investment horizon and are taking longer-term positions in preparation for a US upturn.
Mexican economy should pick up.
Consumer demand remains strong.
Equity markets look good value.
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