After the plunge of the Mexican peso back in 1994, foreign investors have been treating the Mexican ...
After the plunge of the Mexican peso back in 1994, foreign investors have been treating the Mexican market warily. However, a few international financial institutions saw it as an opportunity to strengthen their position in what they believed would be first a recovering, then growing, market.
Although Mexico has a huge population base of around 90 million, because of the poverty there only 10 million considered as targetable by groups.
As a closed market with only peso-denominated funds being sold, the mutual funds market of Mexico is worth around $15bn and growing. At the same time, compared to the 18,000 mutual funds in the US, Mexico only has eight independent fund management companies, many of which are internationally-based companies which arrived following the North American Free Trade Agreement (Nafta).
Recently, US-based Prudential bought 51% of the Mexican funds group Apollo. Other foreign financial companies establishing in Mexico include Dutch group ING, Zurich and Skandia.
The rest of the funds market is controlled by domestic banks, such as Bancomer and Banamex, and Spanish banks. Following Spanish bank BBV's deal with Bancomer, it is now the largest financial group in Mexico. The merger announcement in early March came ahead of the May auction of Mexico's third-largest bank, Serfin.
Mexican banks play an umbrella role acting as fund managers, stockbrokers and insurance companies. Those that do sell funds, sell only their own funds, with only Skandia Vida filling in the multi-manager concept. Skandia America established its Mexican office back in 1994 and has been selling its products to Mexican corporations since 1997.
Distribution in the market is almost non-existent by any other route than a sales force targeting the corporate market. Independent financial advice is difficult to find in Mexico, with the brokers that do exist mainly typical insurance brokers.
Retail distribution is mostly through the direct market. Commissions, which typically feature between 0.5% to 1% trail, do not seem lucrative as much of the market remains short-term focused. Insurance brokers are more accustomed to the higher up-front commissions given on insurance products.
Mexico does not have a savings culture but recent government and corporate initiatives are looking at increasing awareness of the importance of saving. Tax incentives on funds mean that investors, saving for some years, may be able to withdraw sums without penalty.
Afore, started approximately four years ago, is the Mexican programme that requires employers to contribute towards employee pension schemes. Because this is now obligatory, pension provision is becoming more important and increasing the financial awareness of employees. However, investment choice under Afore-type pensions is often limited.
Another problem is that if an employee retires before the official retirement date then the employer could conceivably withdraw all of its contributions. Under the US influence, and as more foreign competition starts to enter the Mexican market, this is expected to change. Groups expect that in the near future employers will move to follow the US example of 401(k) plans.
While 401(k) plans rely heavily on the internet, investors in Mexico are still more accustomed to branches. Although the internet is in widespread use, it will be some time yet before the public fully adopt it for finance. This will keep charges on products relatively high and also inconsistent for some time yet. At the moment, product charges vary greatly. Annual management fees are generally in the range of 1% to 2.6%.
The recent upgrade of Mexico by US credit rating agency Moody's is also anticipated to cause further changes to the market.
Moody's moved the country's long-term foreign currency country ceiling for bonds and notes to Baa3 from Ba1, as well as the long-term foreign currency country ceiling for bank deposits to Ba1 from Ba2. The ratings of the foreign currency-denominated bonds and notes issued by the United Mexican States were upgraded to Baa3. A number of bank ratings, which were constrained by the foreign currency ceilings, were also raised. Mexico's local currency government bond rating was upgraded to Baa1 from Baa3.
As Mexico moves to become an industry-based economy, its ties to the US are perceived as extremely important. Cemex, a cement manufacturer and one of Mexico's largest companies, has recently announced it plans to target American retailers.
Mexico's foreign debt rating boost is expected to increase foreign investment and reduce corporate borrowing costs. Following the upgrade on 7 March, the peso moved to its highest point in almost a year to 9.27 pesos against the dollar. According to Bloomberg, Lehman Brothers plans to add $16bn in Mexican bonds to its US bond aggregate index, the benchmark for dollar bond investors, starting 1 April.
Investors jumping into Mexico's benchmark treasury bill rates, pushed down the yield on the 28-day bill, or cete, to below 14%. The yield fell 101 basis points to 13.95%, the lowest rate since December 1994.
Mexico is now the fifth Latin American country with an investment grade rating by Moody's, with the other countries being Chile, Uruguay, Panama and El Salvador. Skandia Vida believes that it will not be long before Mexico follows Chile in opening its borders to offshore funds.
Foreign investment in Mexico is still predominantly from the US and Canada. According to news reports, early in March direct foreign investment rose to $11.6bn last year, still off its high of $14.95bn before the peso devlauation in the early 1990s. Foreign investment contributed approximately 2.5% to Mexico's GDP in 1999, down from 3.5% in 1994.
Moody's, which believes that Mexico's strong exports to the US and increased capital flows have made the country's level of debt manageab
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