November 9, 2017    6 minute read

Investing in Mexico: Headwinds and Opportunities

Risk or Reward?    November 9, 2017    6 minute read

Investing in Mexico: Headwinds and Opportunities

In a year of spectacular gains in the emerging markets, Mexico has enjoyed only modest success. With presidential elections around the corner in 2018 and Trump escalating rhetoric against NAFTA, investors see Mexico as a land of too many uncertainties. With this, however, comes great opportunity for any investor willing to bet against the herd.

 

Should he win, markets fear a socialist government which at worse could resemble Chavez or Maduro’s Venezuela. A chief critic of Trump, NAFTA looks increasingly vulnerable, and AMLO has consistently decried foreign investment in what he regards as state institutions such as utilities and infrastructure. Acting on his rhetoric could mean the renationalisation of many industries and a debt-fuelled gamble with Mexico’s economy.
Early indications are pointing to a win for Andres Manuel Lopez Obrador (AMLO) in the July 2018 presidential elections, with a recent poll finding that his party, the Movement for National Renewal (Morena), has a 3 point lead over the conservative National Action Party (23%-20%). Those in Mexico, including AMLO himself, will be acutely aware of the volatile nature of local polls. In 2006, he held a large lead at various points in the campaign, only to lose by 0.58%. The battle is very much not over, and a win is a realistic possibility nonetheless.

Whilst this author has previously made clear his belief that the reality of AMLO’s presidency would be far more moderate, there are other reasons to remain faithful to Mexico’s long-term investment prospects.

Corruption  

Much of AMLO’s opposition within Mexico comes from the established elite. Throughout his career, he has raged against a political system he views as riddled with corruption and inequality. He runs on a platform with tackling these as two of his main objectives.

In this regard, today Mexico ranks poorly internationally. The World Bank estimated that in 2014 Mexico ranked as the 24th most unequal society on the planet (with a GINI Index of 48.2), and the Mexico government even admitted earlier this year that 43.6% of the population lived in poverty.

Whilst neoliberal reforms of the 1980s had been intended to open up Mexico to international investment and long-term prosperity, AMLO has constantly criticised the emphasis on foreign capital which has achieved only modest economic growth (annualised 2.4% since 1980) and left many Mexicans behind.

Mexico ranks 123rd out of 176 countries on Transparency International’s Corruption Perceptions Index. In 2016, one in every three people in the country said that they paid a bribe in the last year. This has countless effects. It engrains hereditary oligarchy which preserves individual wealth at the expense of merit, it takes money away from the citizens who can least afford to pay it, keeping people poor, and ultimately defeats the point of a capitalist free enterprise. When a company can win a contract on the basis of contacts and wealth and not on the basis of quality and skills then meritocracy goes out the window, and so does the major incentive of free trade and market economics.

Whether one thinks AMLO can tackle an endemic problem is another question, but without tackling corruption Mexico will fail to be the free-market economy that investors desire. There is logic behind AMLO’s opposition as indeed there is logic to the Mexican elite’s opposition to AMLO. It is not in their interest.

NAFTA

The headline figures reveal 81% of Mexico’s exports going to the United States – a huge exposure.

This author has previously outlined his view that neither Donald Trump nor Mexico can afford to renege on NAFTA. For Mexico, the agreement is too essential to the economy and it would be naïve and ignorant to believe that AMLO would discard this at the expense of a brash political shunning of the USA. Such intimations are nothing short of fabrications led by those who feel threatened by his candidacy.

To the same extent, there are too many individuals close to Trump who have a personal stake in NAFTA’s continuance for this not to have a bearing on his eventual decision.

Critics would say they did not expect Trump to pull out of UNESCO or abandon the Iran deal, but both of those make more sense on further reading. The USA owed significant funds to UNESCO and abandoning the deal with Iran will likely keep oil prices higher, a not too inconsiderable benefit for a chief Trump supporting state, Texas. Accordingly, this author does not accept the argument that Trump likes political statements for the sake of purely appeasing his supporters. There has to be logic behind it.

As such, though NAFTA may be affected, any change will be more modified and less seismic than some make out.

Mexico’s Underlying Positives

Mexico has much going for it, positives that will not be upheaved unless the very extremes come to pass (Trump rips up NAFTA and AMLO is Chavez-esque in his approach).

  1. Diversified Economy

Though significant exposure remains – in the form of 21.7% of exports being associated with the car trade (a chief beneficiary of NAFTA) – the remainder of Mexico’s exports are extremely diverse. The economy does not have the same fundamental dependencies that Venezuela, for example, has on oil (89% of exports), and many other Latin American countries have on commodities. This is without considering a robust internal demand, led by a population of over 127 million.

 

 

  1. Low cost of labour

Whilst educational standards lag behind many countries worldwide (Mexico is ranked 71st in the United Nations Education Index), it is an incredibly cheap place for companies to manufacture goods. Hourly compensation costs in 2015 were 5.9%, meaning it is over 16 times cheaper for companies to employ manufacturing staff in Mexico than it is in the US. This is also cheaper than Poland, Hungary and Brazil to name a few examples. Any measures Trump makes in the form of subsidies will never get close to redressing this clear cost advantage. unless he is prepared to commit Chavez-esque economic suicide.

 

  1. Low debt

Mexico’s national debt as a proportion of GDP, whilst growing, was 43.2% in 2016. Compare this to other developing countries throughout the world and this figure stands relatively well. Brazil’s was 69.49%, Poland’s 54.1%, Hungary’s 74.1% and Vietnam 58.3%. In short, whilst the assertion that AMLO will binge on debt can rightly concern some analysts, Mexico has more room for manoeuvre than many of its peers. If investment is intended to improve education and infrastructure as AMLO has propagated, it could even be welcomed by some as a catalyst for growth.

Conclusion

Whilst the realities of Mexico’s current political situation both at home and to the north are right to cause a degree of hesitation in the international investor, Mexico continues to have many inherent advantages. If hyperbole remains just that, then Mexico – with or without AMLO – could represent an opportunity for an individual looking beyond the headlines.

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