Despite the oil and mining and construction industries having been flat in recent months, Will Landers says continuing high levels of consumption in the US are boosting Mexican manufacturing.
While Landers concedes that the expected upward economic flux did not manifest following the 2013 reforms, he believes that the manufacturing sector can have a wider impact on the Mexican market.
“People have been talking about Mexico and the ‘Mexican moment’ for the last two years,” he said. “There were eight or nine reforms passed in 2013 – the most important being the energy reform, which opened up the sector to investment.
“But the ‘Mexican moment’ never really happened from an economic or market perspective. We haven’t seen it in the numbers yet – there has not been a significant improvement in growth.
“However, wages have been more or less flat for the last decade, which has turned out to be a positive because Mexico is more competitive with China. A lot of jobs moved from Mexico to China because of quality, logistics and costs, but now those jobs are starting to return to Mexico. Consumers and banks are starting to do a little bit better.”
Born in the USA
But what does this have to do with the ongoing US growth story?
“While oil, mining and construction have been flat recently, the manufacturing sector has been doing very well,” Landers explained. “Most of that is geared towards the US – Mexico exports almost a third of its GDP, and more than 80% of that ends up in the US.
“The good news for Mexico is that the US economy has been improving, and we are finally starting to see that have a positive impact on Mexico.”
The effect of low oil prices has generally been associated with one side of the emerging market spectrum – exporters – suffering while the other – importers – reaps the benefits.
However, in Mexico it is a little more complicated.
“The energy reform will see some parts of the sector auctioned off for foreign and private investors,” Landers elaborated. “Of course, the bad side of that is when it passed the oil price was $100 a barrel – now it is close to $50.
“But the energy reform, along with pipelines bringing natural gas down from the US, means that energy costs are much lower. Even if they do not invest in their own gas there is enough coming from the US, which should mean cheap energy prices and therefore economic growth will come through.
“Granted there are not many listed manufacturing companies that will benefit from the low energy prices. But if the story plays out, which I think it will, a lot of the companies that do benefit will want to become listed.”
Taking from the US and giving to the Mexicans
Landers has been acting on his faith in the Mexican growth story with a shift in his portfolio weighting.
While Brazil remains the largest absolute weight in his portfolio, in the past couple of months he has reduced the Brazilian portion in order to top up his Mexican weighting, bringing it to 32-33%
Likewise, Mexican is also his second largest weighting in relation to the MSCI EMF Latin America Index behind Peru, overweight by 2.5%.
