Mexico could enjoy stock market growth of 30%-40% over 2002 and cement its position at the more liqu...
Mexico could enjoy stock market growth of 30%-40% over 2002 and cement its position at the more liquid end of the emerging markets spectrum.
The Mexican Bolsa index has posted growth of 25.62% in local currency terms over the 12 months to 16 April, compared with a 2.16% decline in the S&P 500 over the same period.
Scott Crawshaw, emerging markets fund manager at RSA Investments, believes the Latin American market will be able to maintain the upward trajectory it has enjoyed for the past 18 months.
He says: 'The main strength is that foreign investment keeps flooding into the country and so the currency is strongly backed. There is a lot of oil and financial services money coming in. The cost of production is much cheaper than in the US, where most of the money comes from, and interest rates are at a historic low of 5.5%.'
While Mexico has traditionally had massive exposure to the US autos sector, this is being mitigated by the growth of its financial services sector through huge investments from the likes of Citigroup and BBV of Spain.
Venkat Chidambaram, emerging markets fund manager at GAM, stresses the impact the upturn in the US has had on Mexico, boosting export sectors in particular. While he feels there are better opportunities in Asia, he is still overweight Mexico and has exposure to WalMex, a subsidiary of US-based Walmart, and Grup Telivisa, the Spanish-owned television company.
Despite his bullishness on Mexico, Chidambaram prefers to invest through multinationals, thereby mitigating risk to an extent. Stock selection is further limited by the fact that there are only about 50 stocks liquid enough for an emerging markets fund, about 10 of which are large enough for global funds, he adds.
The strength of the Mexican currency and other positive macro indicators such as low interest rates imply the country is now moving toward a more esteemed position, characterised by its upgrading by ratings agencies to investment grade.
There are a few clouds gathering, however, such as bad political leadership.
President Vincente Fox has been in office for more than a year now. Whether he has quite delivered reforms as far-reaching as many had hoped is open to serious question and has undoubtedly dampened much of the enthusiasm that was a feature of his ascension to the corridors of power.
Crawshaw says: 'The tax reforms in January were weak compared with market expectations. Fox's reputation within his own party seems to be deteriorating too. He came into office offering the public 6% growth a year, but he has not done anything for the people.
'The political concerns are one of the main worries at the moment, along with the country's lack of competitiveness with the Asian markets on low-end manufacturing and what happens if the oil price goes down to $10 per barrel.'
The transition from lower profitability basic manufacturing, such as textiles, to a solid skilled manufacturing base, such as autos, is clearly symptomatic of a country developing an economy more akin to that of a developed economy. Crawshaw adds: 'It is all part of development, it is just a case of how well that transition is managed.'
Mexico to continue outperforming.
Currency well supported.
Valuations good relative to the US.
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