Mexico: maximising its potential

Banking & Finance
| The European | 10th October 2019
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SURA Investment Management is dedicated to the management of assets and investments for global institutional customers. Our presence across six Latin American countries, which is articulated in a regional platform, makes us an optimal investment vehicle to connect the continent with global markets through scalable operating models and high standards of portfolio management.

We create solutions tailored for our clients, seeking to contribute to their competitiveness, for which we manage more than 400 portfolios invested in fixed income, equity, multi-asset and alternative assets. Among our most relevant products are Mutual Funds, Pension Funds and Corporate Mandates.  Our parent firm, SURA Asset Management, is the region’s number one pension provider in assets under management (AUM).

Investment backdrop

We believe Mexico’s new administration under President Andrés Manuel López Obrador, known as AMLO, will lead the country through a process of political transformation that aims to improve the fundamental conditions of the country. The most significant events to affect the Mexican economy, since the new administration took office last December, are the cancellation of Mexico City’s new airport and the USMCA commercial agreement between US, Canada and Mexico.

There was also the credit rating downgrade for sovereign bonds, the credit rating downgrade to the State Oil and Electric Companies’ debt, and the surprising resignation of the Head of the Ministry of Finance Carlos Urzua, which signalled strong disagreement with AMLO’s government. Clearly, if at the beginning of 2019 any investor had forecast these events, they would have immediately sold their Mexican assets anticipating major uncertainty regarding the country’s macroeconomic environment. However, this didn’t happen, in fact, almost all major financial assets in Mexico have generated competitive returns compared with other emerging market (EM) economies. The question is, why? We believe the answer lies in global growth, central banks, and relative attractiveness. Regarding global economic activity, even when fundamental data continues to support an economic growth trend in many developed markets, investors are starting to anticipate the end of an economic cycle amid several years of economic growth.

Central banks around the world had signalled concern due to low economic growth and lack of inflation, which led to them shifting their monetary policy stance. This radical change that occurred in 2018 boosted liquidity and a yield search trend around financial markets. Under the recent yield search trend, investors are looking at countries with stable macroeconomic conditions combined with attractive financial markets. Amid low rates that can potentially be even lower in the short term, investors are allocating assets to countries that offer positive rates and undervalued equity markets. Against this backdrop, Mexico is currently offering high rates in the local fixed income market and a potential high return in the equity market. The country ranks among the top five EMs with a +2% real rate adjusted for risk. Regarding the FX market, the Mexican peso has had a strong relative return of +1% before this was published. Likewise, although the Mexican stock market is pricing a more uncertain macroeconomic environment, in relative terms it looks attractive when compared with other major equity markets around the world.

Moving forward

As we look to the future for SURA Investment Management, the Mexican economy will continue on a moderate growth path, although potentially lower amid decelerating global growth and political decisions from the Mexican government that may jeopardise investment confidence. These events may cause slower deployment of economic resources, negatively affecting consumer demand and investment. As previously mentioned, even when there is not yet clear evidence that the macro environment is in danger, in order for the Mexican economy to keep its economic stability and attractiveness for foreign investors, financial discipline is paramount, and the so-called primary surplus must be achieved. Also, debt levels must remain under control and the national oil company’s financial situation should be stabilised.

If the Mexican government is able to keep macroeconomic stability, even with non-orthodox policies, Mexican financial assets should clearly outperform its peers, as some fundamental risks are still priced in the Mexican fixed income and equity markets. Under this scenario, the potential yield compression in the local currency Mexican bonds remains attractive, while the equity market return should improve.

Finally, for SURA Investment Management, global liquidity amid dovish central banks and relative attractiveness will allow positive Mexican trade to continue until any strong evidence suggests that the macroeconomic environment is really deteriorating. The lack of any fundamental threat will boost Mexican financial assets, normalising the extra risk premium that prevails in several financial instruments, which suggests an interesting catch up with the strong performance of its peers.

Further information

www.suraim.com.mx

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