The Mexican economy is slowing down. While its growth for 2022 was 4% and that of 2023 was still around 3.3% on average, the last quarter of the same year saw the economy slow down significantly, with only 0.1% growth compared to the previous quarter and 2.5% over one year.
A gap that is not worrisome, in our opinion. We remain present on the Mexican stock exchange.
Limited consumption, party investors
The reasons for the Mexican slowdown are on the side of the country's noticeable tightening of credit conditions. Mexico experienced a significant spike in inflation in 2022, which approached its peak of 9%. To combat it and preserve the credibility that has characterised it for many years, the Banxico (the Mexican Central Bank) has tightened its monetary policy sharply. At 4.0% at the beginning of summer 2021, Mexican policy rates have been raised to 15 (!) recoveries since to reach, in March 2023, 11.25%, a level they have maintained since.
Such a level of interest rates is bound to weigh on the ability of households to spend. It, therefore, contributes to the slowdown of the economy. Nevertheless, it is well above inflation - and therefore offers largely positive returns in real terms - and has pleased investors looking for returns. Among those who rushed to Mexico, there is foreign capital. Still, the important ones from the vast Mexican diaspora in the USA have not hesitated to increase remittances to Mexico to record levels. Since the first rate hike, the peso has appreciated more than 30% against the euro and is currently a little overvalued against our currency. Mexican equities increased over the same period: 66% (in €); outperforming the global stock markets.
Banxico remains cautious
The strengthening of the peso and the expensive credit that has cooled consumers' enthusiasm have made it possible to better control inflation, which has fallen to 4.7%. But despite the sharp decline in inflation, Banxico (Mexican central bank) is not in a hurry to start lowering interest rates.
Like many other central banks, it wants to avoid a possible rebound in consumer prices. And in his case, it is clear that caution is needed: Mexico is in an election year, with general elections on June 2. In anticipation of this election, which will decide the identity of the Mexican president for the next six years, all the House and Senate representatives and the gifts to the voters multiply, and the Mexican public deficit will be higher than usual. Let us add that this election is taking place in a promising situation, with investment and a healthy job market. The monetary authorities fear that a surge of public money in the economy will result in a new surge in consumer prices.
An unprecedented wave of investment
If the country manages to reconcile interest rates of more than 11% and an average growth rate of 3.3% in 2023, it is because it is the winner of significant background trends. Mexico has always enjoyed privileged ties with the United States. The integration of the Mexican economy with the American and Canadian markets was further strengthened with the signing of the NAFTA free trade agreement (Alena in French) and the successor agreement, the USMCA (ACEUM in French). Finally, these two agreements are close to each other, meaning that Mexican production enjoys privileged access to North American markets, with some conditions.
This free access became very important when the US authorities showed their willingness to reduce their dependence on China and to shorten and secure their supply chains. This movement has provoked a veritable flood of investment in Mexican territory. This one takes dimensions of tsunami since the Inflation Reduction Act was approved in the United States. The latter aims to promote the energy transition and make the United States and its large region a leader in the field. Since Made in Mexico is eligible for aid and other subsidies from the US state, car, battery or semiconductor manufacturers rushed to this country to build cheaper goods that will subsequently supply the US market.
Therefore, it is no surprise that despite the expensive credit, investment has remained strong, and the job market is close to overheating, with an unemployment rate of only 2.6% in December.
By the way, the fate of the Mexican economy is increasingly linked to that of the American economy. And since the US economy has great potential because it will be the leader in all future sectors, Mexico is well positioned to benefit from it. It isn't easy under these conditions to predict anything other than a bright future for this market, despite sometimes perfectible governance.
Despite its outstanding recent performance, the Mexican stock exchange is not particularly expensive. The MSCI Mexico, trading at valuation levels very close to the average of emerging countries, is significantly cheaper than the world index dominated by the United States.
The MSCI Mexico is dominated by the consumer staples sector (38% of the total), which should continue to benefit from the excellent labour market performance and the gradual decline in the cost of credit. Next come the financial sector (18%) and the materials sector (17%). This stock exchange is well-positioned to benefit from the expected improvement in Mexicans' standard of living.
We continue to invest in them as part of our portfolio.