February 2, 2016    4 minute read

Mexico: A Diamond in the EM Dirt

   February 2, 2016    4 minute read

Mexico: A Diamond in the EM Dirt

Emerging markets have collapsed, Nigeria has requested an emergency loan in order to cope with the oil price rout, South African and Southern American assets are tumbling in value and being sold in ever higher volumes, the market is gripped with fear.

Fear is the most pervasive of natural human instincts, whilst some believe it plays a role in the rational thought process setting limits on risky behaviour it can often plague the financial markets leading price messages far astray from fundamental value. However, if one is prudent enough to stand tall as the wind blows opportunity is never too far away, or in the words of Joseph Campbell;

“The cave you fear to enter holds the treasure you seek”.

When focusing on South Africa and Mexico, the stark differences in a seemingly mixed bag are clear for all to see. In recent months, both countries have sold like hot cakes, with less delicious consequences. The South African rand was already weak against the dollar but has fallen off a cliff since late January. Likewise, the Mexican peso has tumbled, despite the period of relative stability at the close of 2015.

Whilst the sell-off of south African assets isn’t lacking in justification the same cannot be said for Mexico’s. With an investment grade and credit rating under threat, employment at 25%, interest rates are set to rise from 6.25%, whilst low commodity prices have no doubt dampened the economic performance, infrastructure bottlenecks and weak governance have held business back to a similar degree. It would take a great salesman to pitch South Africa at this point even to the South Africans.

Mexico does indeed also have its own problems. Enrique Peña Nieto, the president, has approval ratings at rock bottom levels, they fell to the lowest level of any recent president after he failed to respond adequately to the disappearance of 43 students in Ayotzinappa which has drawn him national and international criticism. In addition, the escape of “El Chapo”, an international drug dealer and cartel boss, raised questions regarding the rule of law in Mexico and structural stability going forward.

However, El Chapo’s recent recapture was both a symbolic and real turning point for the Mexican president. The structural reforms which he enacted early in his tenure are starting to take effect. Increased competition in the telecoms market means mobile-phone charges have dropped over 12% and continue to fall. This is impressive even when compared to the UK even where Ofcom have recently appealed to the EU to halt the proposed merger between O2 and Three in order to prevent further price increases as O2 seek a controlling stake in what is already an oligopolistic market.

Furthermore, reforms to the financial sector, including new legislation aimed at allowing failing businesses to be more easily wound up are starting to take effect. In a country that has had very small levels of credit since the Tequila Crisis, these new rules should help growth easing the credit market exclusion faced by so many.

Finally, consistent and well reasoned central bank policymaking, conducted independently from government should give investors another vote of confidence. The robust framework Mexico has established has meant that in spite of oil price pressures they were still able to sell all exploration and extraction licences in a recent auction.

In a market often too fast-paced for detailed fundamental analysis – Mexico is selling at speed and in similar volume as South Africa. Why? Fear. Investors are running from anything with an emerging market label.

When fear sets in, irrationality follows and bargains are left behind. Long-term investors would do well to look through the noise and focus on the real happenings in these countries, with ample room to benefit from the strong foundations that exist in many cases.

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