The Case for Mexico
By: Malcolm Dorson, Senior Portfolio Manager
As of August 24, 2021, Mexico’s equity market has rallied 15.8% year-to-date, measured by the MSCI Mexico index, yet still shows room for outperformance. After lagging the broader market in 2020 on skepticism of the country’s COVID-19 pandemic policy response, Mexico has boasted a solid foundation for growth based on the combination of a global reflation trade, prudent fiscal policy, and strong linkages to the US economy. These tailwinds have driven expectations of 2% GDP growth for 2021 at the beginning of the year up to 6% today.
Piggybacking off the US
The US economic rebound has driven roughly two-thirds of Mexico’s positive GDP revisions, and expectations for the US stimulus package should continue supporting the regional recovery. The other third has come from surprisingly strong domestic consumption. Unlike other countries in Latin America, Mexico did not benefit from large fiscal programs to support households or liquidity boosts coming from pension fund withdrawals. We believe domestic consumption picked up due to the post-COVID-19 re-opening and from a pick-up in domestic tourism, as COVID-19 restrictions prevented international travel.
Gridlock is Good
Mexico’s political environment previously presented a challenge to building conviction in the country, but we believe the landscape has improved. In the first half of the year, we followed midterm elections (3,000 offices including 500 seats of the Lower House of Congress, 15 of 32 Governorships, and 30 of 32 state assemblies), which led to the left-leaning Morena party losing the qualified majority in the Lower House. These election results were a positive market outcome, as it creates headwinds for President Lopez Obrador (AMLO) to pass much-feared fiscally unorthodox proposals in the second half of his term. Since 2018, AMLO’s approval has remained above 50% but has consistently declined from near-80% levels.
Attractive Valuation Multiples Relative to Returns and Growth
From a valuation perspective, as of August 24, 2021, Mexico traded at 14.4x price-to-earnings compared to the S&P 500 at 22.3x P/E. From a price-to-book (P/B) perspective, Mexico traded at roughly a 50% discount to the US with a multiple of 2.1x versus 4.5x for the broad US market as measured by the S&P 500. Furthermore, Mexican companies' return-on-equity ratios (ROE) have climbed to a remarkable 27.6%.
Mexico is currently experiencing a third wave of the COVID-19 pandemic, reaching over 3 million cases and an average death rate of 7.9%, the highest amongst Latin American peers. That said, the country has administered over 80 million COVID-19 vaccines as of August 24, 2021. Assuming every person needs two doses, that’s enough to have vaccinated about 31.7% of the country’s population. These numbers should improve as Mexico could benefit from its diversification of vaccine suppliers (Mexico has eight vaccines approved) and vaccine donations from the US’s surplus.
China’s Loss Could be Mexico’s Gain
As US/China tensions grow, the “near-shoring” of manufacturing should act as a steady long-term tailwind for Mexican growth. Trade tensions, COVID-19-driven supply disruptions, geopolitical friction, and the potential added cost of increasing regulations should force US supply chains to reassess manufacturing benefits in Mexico over China. Though adjusting one’s supply chain is a long and expensive task, Mexico offers various benefits, including fewer trade frictions, cheaper labor, and favorable tax benefits for manufacturers. A study conducted by Grupo Bursátil Mexicano (GBM) to assess the potential impact of near-shoring on Mexico’s GDP determined that for each 5% substitution rate, Mexico’s GDP could grow by an additional 1.4%.
The combination of political gridlock, robust US GDP growth, the tension in China, and a wave of COVID-19 vaccinations, present a strong backdrop for Mexican equities.
 Bloomberg, estimated 12-month forward multiples. As of August 24, 2021. Note: Mexico equities measured by MSCI Mexico Index, US broad market measured by S&P 500.
 Reuters, COVID-19 Tracker. As of August 24, 2021.
Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period.
Near-shoring is the transfer of business processes to companies in a nearby country.
Price-to-Book (P/B) Ratio measures the market's valuation of a company relative to its book value.
Price-to-Earnings (P/E) Ratio relates a company's share price to its earnings per share. A high P/E ratio could mean that a company's stock is overvalued.
Return on equity (ROE) measures a corporation's profitability in relation to stockholders’ equity and is calculated by dividing net income by shareholders' equity.
MSCI Mexico Index is designed to measure the performance of the large- and mid-cap segments of the Mexican market. You cannot invest directly into an index.
Standard and Poor's 500 (S&P 500) index is designed to measure the performance of 500 large US companies. You cannot invest directly into an index.
For a list of the top ten holdings of the Emerging Markets Great Consumer Fund as of the most recent quarter-end click here. Holdings are subject to change at any time.
The views and information discussed in this brochure are subject to change and may not reflect the current views of the writer(s). The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles. It should not be assumed that any investment will be profitable or will equal the performance of the portfolios or any securities or any sectors mentioned herein. The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation.
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