CLOSE

We permit the publication of our auditors’ report, provided the report is published in full only and is accompanied by the full financial statements to which our auditors’ report relates, and is only published on an access-controlled page on your website https://www.hermes-investment.com, to enable users to verify that an auditors’ report by independent accountants has been commissioned by the directors and issued. Such permission to publish is given by us without accepting or assuming any responsibility or liability to any third party users save where we have agreed terms with them in writing.

Our consent is given on condition that before any third party accesses our auditors’ report via the webpage they first document their agreement to the following terms of access to our report via a click-through webpage with an 'I accept' button. The terms to be included on your website are as follows:

I accept and agree for and on behalf of myself and the Trust I represent (each a "recipient") that:

  1. PricewaterhouseCoopers LLP (“PwC”) accepts no liability (including liability for negligence) to each recipient in relation to PwC’s report. The report is provided to each recipient for information purposes only. If a recipient relies on PwC’s report, it does so entirely at its own risk;
  2. No recipient will bring a claim against PwC which relates to the access to the report by a recipient;
  3. Neither PwC’s report, nor information obtained from it, may be made available to anyone else without PwC’s prior written consent, except where required by law or regulation; and
  4. PwC’s report was prepared with Hermes Property Unit Trust's interests in mind. It was not prepared with any recipient's interests in mind or for its use. PwC’s report is not a substitute for any enquiries that a recipient should make. The financial statements are as at 25 March 2017, and thus PwC’s auditors’ report is based on historical information. Any projection of such information or PwC’s opinion thereon to future periods is subject to the risk that changes may occur after the reports are issued and the description of controls may no longer accurately portray the system of internal control. For these reasons, such projection of information to future periods would be inappropriate.
  5. PwC will be entitled to the benefit of and to enforce these terms.
I accept
CLOSE

1. Select your country

  • United Kingdom
  • Austria
  • Australia
  • Belgium
  • Denmark
  • Finland
  • France
  • Germany
  • Iceland
  • Ireland
  • Italy
  • Luxembourg
  • Netherlands
  • Norway
  • Singapore
  • Spain
  • Sweden
  • Switzerland
  • USA
  • Other

2. Select your investor type

  • Financial Advisor
  • Discretionary Investment Manager
  • Wealth Manager
  • Family Office
  • Institutional Investor
  • Investment Consultant
  • Charity, Foundation & Endowment Investor
  • Retail Investor
  • Press
  • None of the above

3. Accept our terms and conditions

By clicking Proceed I confirm I have read the important information and agree to the terms of use.

Proceed

The Hermes Investment Management website uses cookies to remember your preferences and help us improve the site.
By proceeding, you agree to cookies being placed on your computer.
Read our privacy and cookie policy.

Mexico: Not in crisis but hold the tequila

Hermes Emerging Markets

Home / Perspectives / Mexico: not in crisis but hold the tequila

Yasmin Chowdhury, Senior Investment Analyst
20 April 2017
Emerging Markets

This piece is part of a two-part series on Mexico. The second part, a case study of a buying opportunity we found in the market, will be available next week.  

Following his outlandish campaign-trail declarations, the popular consensus is that the election of US President Donald Trump will be bad for Mexico. Indeed, with the country facing its own potentially challenging elections, the outlook for the Mexican economy should be decidedly negative. However, the risks presented by these scenarios appear to have been overplayed, with subsequent sell-offs creating attractive opportunities in the market.

Mexico’s economy: better than you think
Since the 1980s, Mexico’s economy has been characterised by periods of crisis and recovery. The 1980s, described as ‘the lost decade’ as falling oil prices increased national indebtedness, were succeeded by growth in the early 1990s as the North American Free Trade Agreement (NAFTA) took root. These gains were wiped out by the collapse of the peso in the ‘Tequila crisis’ before strong exports drove a recovery in the late 1990s. Then a US downturn brought recession back in 2001. Mexico was hit again by the 2008 crisis, before the proposed reforms of President Enrique Peña Nieto paved the way for the return of growth, although the recent collapse in the oil price has stymied some of these reforms. More recently, President Trump’s protectionist rhetoric – which includes ripping up NAFTA, implementing a border tax, forcing Mexico to pay for a new wall on their shared border and sending back 11m illegal immigrants – has triggered a sharp sell-off in Mexican assets and a 19% depreciation in the peso to a record low of 21.8 pesos to the dollar.

View from the ground
When we visited Mexico last month, we expected to find a country nervously anticipating the actions of the new US president. Instead, we found that sentiment had recently shifted after Wilbur Ross, the US Secretary of Commerce, said that a trade deal benefiting the peso would be favourable as this should make US exports cheaper. Since then, this optimism has been boosted by National Trade Council Director Peter Navarro's comments about creating a North American manufacturing power house to reduce imports from the rest of the world. Since its trough in mid-January, the peso has appreciated 15%.

Further, most Mexican businesses have already priced in the worst case scenario for the US trade deal in their forecasts and business plans. Their growth forecasts are significantly lower than the consensus views in the global market. Meanwhile, record-low unemployment and record high remittances have lifted consumer sentiment from its late 2016 doldrums.

Political risk:  it’s south of the border, too
The biggest immediate risk factor for the country now is the election in the State of Mexico (Estado de México or ‘Edomex’) in June. As the largest Mexican state by population, Edomex voters’ decisions have been indicative of the outcomes of subsequent presidential elections. The State of Mexico has been a stronghold of the governing party, the Institutional Revolutionary Party (PRI), but recent polls indicate that the Morena party, led by controversial leftist candidate Andres Manuel Lopez Obrador, is quickly gaining popularity. Obrador has openly criticised Mexico’s neoliberal economic model of recent decades, including the privatisation of state-owned companies and a range of structural reforms. In our view, the reversal of these reforms would be detrimental to the country’s sustainable growth and a significant market sell-off would likely follow a Morena win. Although many Mexicans still view this as unlikely, the vote for Brexit and Trump’s victory were built on anti-establishment sentiment, and a Moreno win is a very real tail risk in our investment case for Mexico.

Waiting for the tequila
Despite this risk, we believe there is limited downside for the Mexican economy. The peso has taken the brunt of the negative news and, given that it is trading close to historical lows, it seems to be pricing in the economic risks. This view is premised on a Morena loss in the Edomex elections; its victory would create a new set of uncertainties for the country.

We believe there is a reasonable chance that US trade policy will be more benign than expected, and that growth in the US will ultimately aid Mexico, its largest trading partner. If all of these challenges dissipate, as we expect them to, the market should perform in line with other emerging markets in the coming years – a much more promising outlook than is widely being touted.

Share this post:
Yasmin Chowdhury Senior Investment Analyst Yasmin Chowdhury joined the Hermes Global Emerging Markets team in July 2013 as an investment analyst with a focus on EMEA and Latin America. Prior to this she was an analyst for the Hermes Commodities team, where her main responsibilities were to monitor and analyse data on global commodity markets, with a focus on the agriculture and livestock sectors. Previously she worked as an accountant within the Hermes Finance team. Yasmin holds a BSc (Hons) in Maths with Economics from University College London and a Postgraduate Diploma in Actuarial Science from Cass Business School. Yasmin is also a qualified Chartered Management Accountant from the Chartered Institute of Management Accountants (CIMA) and is currently studying for CFA level III.
Read all articles by Yasmin Chowdhury

Find posts by author

  • Alex Knox, ACA
  • Andrew Parry
  • Andrey Kuznetsov, CFA
  • Audra Stundziaite
  • Dr Michael Viehs
  • Elena Tedesco
  • Eoin Murray
  • Gary Greenberg
  • Geir Lode
  • Hamish Galpin
  • Ilana Elbim
  • Jonathan Pines, CFA
  • Joseph Buckley
  • Louise Dudley
  • Mark Sherlock, CFA
  • Martin Todd
  • Michael Russell, CFA
  • Michael Vaughan
  • Mitch Reznick, CFA
  • Neil Williams
  • Nina Röhrbein
  • Patrick Marshall
  • Philip Nell
  • Saker Nusseibeh
  • Tatiana Bosteels
  • Tim Crockford
  • Tim Goodman
  • Tommaso Mancuso
  • Yasmin Chowdhury

Find posts by category

  • emerging markets