Over the last two years, investors remained indifferent to Mexico, primarily because of the uncertainty surrounding the North American Free Trade Agreement (NAFTA) and also as they awaited the outcome of the country’s general election. However, as one of Latin America’s leading asset managers, with more than $11.5bn assets under management, SURA Investment Management (SIM) maintains that investors should not forget the strong macroeconomic fundamentals which made Mexico so resilient in recent years.
With regards to NAFTA, two years have passed since the current US Administration took office and focused its efforts on upgrading the trilateral trade agreement, which was initially signed in the early 1990s. The urgency prompting US government policy aimed to address the commercial deficit between the US and Mexico, which was mainly driven by the development of the automotive industry in Mexico during the last 20 years.
Several roundtables were set up in the US, Mexico and Canada, to not only discuss the implications of the commercial agreement, but also the potential impact to certain industries that are essential to the countries involved. However, for SIM’s Mexico investment team, one of the most critical stages in the negotiation was when the US and Mexico signalled a bilateral agreement, non-dependent on Canada to continue their commercial relationship, considering that the US represents more than 60% of Mexico’s total exports. By the end of August 2018, a bilateral agreement between US and Mexico was reached and this placed pressure on Canada to resume the negotiations with US. Finally, by the beginning of October 2018, Canada agreed with the US and Mexico to continue with a trilateral trade agreement named USMCA (US-Mexico-Canada agreement) and the uncertainties regarding their commercial relationship in the region were clarified.
While the NAFTA negotiations were taking place, Mexico’s general election added additional uncertainty to the country’s future. These two events meant that SIM followed a cautious strategy in its Fixed Income and Equity portfolios, which later proved to be the correct stance.
The presidential race in Mexico began in February 2018 with three primary candidates: Jose Antonio Meade, previous Secretary of Finance with the ruling party (PRI); Ricardo Anaya as representative of a coalition between the centre right (PAN) and centre left (PRD); and Andres Manuel Lopez Obrador – third time candidate and representative of the leftist party MORENA.
From the beginning of the general election, Mr Lopez Obrador held an advantage that proved impossible for his competition to break down. His rhetoric was based on fighting escalating corruption and crime, the cancellation of some structural reforms approved by the ruling party, and the review (and potential cancellation) of large infrastructure projects led by the current administration, such as Mexico City’s new airport currently under construction, claiming excess cost and corruption. It is worth mentioning that Mr Lopez Obrador will be Mexico’s first truly leftist president, and his victory was interpreted as a vote against several corruption scandals during the current administration and increasing violence in many of Mexico’s states.
For SURA Investment Management, the surprising fact of the election was not that Mr Lopez Obrador won the presidency, but that his coalition won an absolute majority in the lower and upper house. While this will give him absolute power to implement his political strategy, he has also moderated his speech to give certainty to local and foreign investors.
At the time the NAFTA negotiations and general election were taking place, there were different global shocks hitting the financial markets. The US threatened China with more commercial tariffs, while some emerging countries with macroeconomic imbalances such as Turkey and Argentina were feeding the financial turbulence. These events in conjunction with a more hawkish FED caused the financial variables of several countries to deteriorate and investors to review their Emerging Market’s asset allocation. The question is what has made Mexico so resilient against local and external volatility? For SIM, the answer is solid macroeconomic fundamentals.
When analysing Mexico’s macroeconomic situation, SIM’s Mexico Investment team highlights that even when the country has grown under its potential for the last decade, it has averaged a steady GDP annual growth rate of 2.10%, a very attractive rate when compared to other DM and EM countries.
In terms of fiscal budget, Mexico has also shown stable fiscal deficits that accounted for 1.1% of GDP in 2017, the lowest of the most relevant countries in Latin America and well below the 2.5% deficit lecture of 2016. Further, the current account deficit in Mexico has also been well managed with a lower than 2.0% deficit in 2017.
Regarding CPI, the last two years had been tough for Mexico as inflation had run above the Central Bank’s target of 3%. However, SIM believes this is a transitory effect because of the strengthening of the government’s public budget, having gradually reduced subsidies to gasoline prices. It is important to mention that Mexico’s five-year CPI average has been 4%, and without 2017 it would have been close to 3.5%.
On the same tenor, we should emphasise the extraordinary job the Central Bank has done over the last few years to keep Mexico’s financial stability, regulating monetary policy as needed.
Therefore, when investors look back and ask themselves why Mexico has been resilient against local and external shocks, SURA Investment Management emphasises the solid macroeconomic fundamentals which back up Mexico’s performance in the financial markets.
Going forward, Mexico’s fundamental strength relative to other countries will be important in resisting potential volatility resulting from a global slowdown after a long cycle of economic expansion.