Fund manager's comment/Rupert Brandt
Last month saw the Mexican stock market increase by more than 7% as a result of the sale of Mexico's second largest bank to Citicorp. On a 12-month view, investors should remain overweight on Mexico. The economy is doing very well and all the indications are that the next twelve months will be an exciting time for the region.
The Mexican market should be a key beneficiary of a pick-up in US sentiment during the second half of this year and the first half of next year. Inflation in the region has fallen from 9% in 2000 to a run rate of 6.5% currently and is targeted by the central bank to converge with NAFTA average inflation by 2003.
In addition to this, interest rates have fallen from 18% in January to just below 13% at the present time. We expect them to end the year at 12% and continue to fall further to 10% in 2002.
GDP is expected to grow by 2%-3% in 2001 with 5% real earnings growth despite the US slowdown. The Mexican consumer has just started to recover from the Tequila crisis and this should continue to underwrite GDP growth in 2001 and 2002. It is expected to accelerate to 5% next year with an associated acceleration in earnings growth to 20%.
President Fox is expected to pass the majority of the economic reforms by the end of the year, this should trigger a Standard & Poor's upgrade on Mexico's sovereign debt to investment grade. The market is only valued on 6.4x EV/EBITDA, which remains a substantial discount to the 10-12x multiple Mexico trades on at the top of its historic trading range.
Foreign Direct Investment (FDI) in the first five months of 2001 is greater than in all of 2000, despite the US slowdown. Volkswagen recently announced plans to invest US$1b in a new Auto plant to serve the European and US markets from Mexico, for example. This will increase exports, which have already seen a significant increase in the past year. Auto exports to the US from the beginning of the year to April have grown by 3.4% year on year in volume (more in US$ value).
However, in the very short term there are a number of uncertainties, which may well cause the market to fall. These include a sell-off in the peso, which is looking increasingly expensive but is being supported by genuine market flows which show no signs of slowing down.
Fox failing to pass the economic reforms would be a major blow to the economic situation in Mexico. As these policies are never guaranteed to be passed, investors should bear this in mind. The expected deterioration in the current account deficit from 3.5% to 4%-4.5% of GDP in 2001 is mitigated by very strong FDI. Other factors that could affect the markets are a major sell-off in oil prices and in the US markets.
Mexican market to benefit from US rally.
Low inflation in region.
Economic situation generally positive.
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