For 3 years, the S&P/BMV IPC Mexican Stock Index (Mexbol) has outperformed the S&P 500 both in local currency and in dollars. For an emerging country, it is important to carefully analyze its currency, a significant part of the stock market performance in USD or EUR. The Mexican peso has appreciated against the USD since 2022, as the Mexican central bank raised its key rate relatively early.
Today, the plateau on the reference rate and expectations of a decline are less supportive for the currency, without us anticipating a marked decline. The market anticipates a return of the reference rate below 10% (11.25 today) in the first half of 2024 and a USDMXN price at 18 (17 today). Since the start of 2022, the Mexican peso has been the strongest emerging currency against the USD. The peso is sensitive to changes in oil prices, Mexico being a (small) oil producing country with 2 million barrels/day, or 2% of world production.
Mexico benefits from the USMCA, United States-Mexico-Canada Agreement, trade conflicts between the US and China and onshoring/nearshoring American, that is to say the American repatriation of production lines and supply chains to the United States and/or to neighboring countries, namely Mexico and Canada. The United States benefits from Joe Biden’s major reindustrialization plans, the Infrastructure and Jobs Act, the Chips Act and the Inflation Reduction Act, incorporating significant subsidies and tax credits. Mexico seems to be one of the best-placed emerging countries in this new “Cold War”, along with India and Vietnam.
Foreign direct investment jumped 40% in 2023. U.S. dependence on Mexican imports has increased since 2017, particularly in automobiles, PCs, electronics and electrical equipment.
However, there are risks in Mexico with a left-wing president Andrès Manuel Lopez Obrador (AMLO) who wants to increase the role of the State in the economy, Mexican companies reluctant to borrow to accelerate their growth, a significant global competition from other emerging countries to replace China and domestic structural problems such as poor infrastructure, recurring electricity production cuts, water scarcity or limited space for industrial development.
An economically and geopolitically deglobalized world no longer allows emerging stock markets to play as a bloc. We must adopt an approach bottom-up. Mexico, India and Vietnam seem best positioned.
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