Mexican markets: Warnings or fearmongering?
Political commentators keep warning of the Mexican president, but the economy has proved resilient and it is outperforming developed and emerging markets.
London, 2 March 2023.
Since Andrés Manuel López Obrador (or AMLO as he is commonly known) came to the presidency in December 2018, there have been many concerns about populism and hindering economic policies in Mexico. Despite worries, nonetheless, the country has been growing and, in 2022, outperformed its northern neighbor.
Politically-driven commentary has pushed the point that AMLO is bound to crush Mexico’s institutions and economy. As his six-year term comes to an end in 2024, he is yet to prove such commentators right. The key point is not that AMLO’s policies have been particularly effective, but that the Mexican economy has proved dynamic and resilient.
There is a political risk with AMLO, as the northern neighbor hasn’t come to trust him. The Wall Street Journal has given special attention to the Tabasco-born president, warning of his actions – a headline compared him to Venezuela’s Chávez. The biggest worry is that he may nationalize industries or implement restrictive policies for Foreign Direct Investment (FDI). However, such concerns are yet to materialize. A brief hand wringing over a Tesla factory was swiftly ended after a phone call between Elon Musk and the Mexican president. Mexico is still the 10th most popular destination for FDI, mostly for extractive industries and automobile manufacturing (UNCTAD).
The picture is quite flattering for AMLO during the first four years of his term. GDP growth has kept going, from $1.22tn in 2018 to $1.42tn in 2022 (IMF). In per capita terms, this equates to a growth from $20,640 to $22,440. This is despite an expected slump during the Covid-19 pandemic; other economies are yet to recover to 2019 levels. More importantly, the Mexican economy has kept growing after the end of the commodity boom. This is crucial given that many Latin American economies have struggled since. For instance, Brazil’s GDP, though higher than Mexico’s, is yet to recover since heights between 2010 and 2014. In 2022, at $1.89tn it was 30% lower than in 2014.
For 2022, Mexican markets have fallen, yet not by as much as US stock indices. As for the peso, it has performed very well against the dollar for the last year. Latin American currencies have gained a notoriety for instability and inflation, but Mexico and few other economies have has broken out of that. That is, even while the euro, the pound and other major currencies had a particularly bad year. Throughout 2022, the peso’s value went from 20.5 per dollar to 19.48, a 5% appreciation. By March 2nd, 2023 it traded at 18.17 per dollar, an 11% appreciation since January 2022.
The main backers of the peso have been high interest rates by the Banxico, as the central bank is known. They started hiking before the Fed, and more aggressively. Additionally, the inflows of remittances and digital nomads are likely to play a part. These two processes mean that dollars are flowing in and getting exchanged for pesos to pay for goods and services. This would not be the case in smaller Latin American economies, which have de facto dollarizations in place.
From a US investor’s point of view, 2022 made losses but without large ones. Investing in the main Mexican index plus accounting for the dollar’s depreciation would mean a loss of 3% – a loss nonetheless, yet better than the bear markets in the US and much of the developed world. Stock-picking is a fool’s task, but growth forecasts position Mexico well for 2023 and 2024.
The key point on Mexico’s markets is that, although the economy has very close ties with the US, they often produce different results. Worsening economic conditions in the North can sometimes mean better growth across the border. The internal dynamics are fundamentally different, and so similar global phenomena can mean different things in each of the two countries.
This scenario proves why investors need quality data and analysis when it comes down to emerging and developing economies. If instead of reading opinion columns, an investor were to read thorough analysis, they could have taken advantage of a relative discount in AMLO’s term and reap the benefits as the stock market, the peso and the economy at large keep gaining value.