While 2022 has been a grim year for equity markets, not all have been affected similarly. Mexico was one of the year's big winners with a 13% gain (price and dividend, in €). A performance that owes as much to the proximity of the United States as to a credible and reassuring Central Bank. We remain present in this market.
For Mexico, when America goes, everything goes
In Spring 2020, Mexico made headlines as oil prices fell to negative levels. As the country sold a large part of its oil production in advance, it had not been affected by the fall in prices. This stroke of luck contrasts with the lack of investment in Mexico's energy sector because of the State's control over this resource. Hydrocarbon production could be even more important with a better-managed strategy.
Mexico's governance problems are not new. But the country remains rich in hydrocarbons, and its situation on the border with the United States constantly offers it new opportunities. This was the case in 2022.
With the United States close to full employment, Biden abandoned the draconian border control policies that characterized the Trump years. Instead, attracted by the lack of labour in the United States and the much higher wages, a new wave of Mexican and Central American workers took a step towards the North.
For the Mexican economy, the result was not long in coming. Remittances from Mexicans working abroad (mainly in the United States) to their families in the country reached record highs, reaching over USD 5.36 billion in October alone. Over the first ten months of the year, these shipments, which keep many Mexican families afloat and some say the economy as a whole, exceeded USD 48.3 billion.
But it is not only through emigration that the Mexican economy benefits from the growth of its northern neighbour. In September, Mexican exports to the United States reached USD 52.3 billion. A 25% increase compared to September 2021 and, above all, a new absolute record.
Onshoring to benefit Mexico
The United States, therefore, remains the engine of the Mexican economy and everything leads us to believe that this will not change anytime soon since the trend towards increasing Mexican exports to the United States – which already absorb more than 80% of its exports - will continue. At issue is Washington's desire to decouple its production lines from China's.
The motivations of the United States are many: Geopolitical will keep its hegemony, shorten the chains to better know and control them, avoid feeding the one that is emerging as its main competitor on the international scene, prevent the theft of intellectual property and the leak to China of American know-how.
But to achieve this decoupling, we must find alternatives to Chinese production. Some countries in Asia will undoubtedly have a role to play. But they will not be the only ones, and Mexico, closer to the United States geographically, is a country on which the Americans rely a lot.
With the Inflation Act – the plan to combat inflation – the United States intends to develop the technologies of tomorrow in the fields of environment and science. Taking advantage of the hundreds of billions of dollars of public funds promised by the White House, the semiconductor, battery, hydrogen and many other industries intend to invest heavily. The industry will have to locate its production in North America to benefit from this aid. So many companies in the sector are looking at investing in Mexico.
This is a golden opportunity for this country, which will see its industry and exports diversify to sectors in which it is still not present. If Mexico plays its cards correctly, the next decade should be beautiful, even if a gap in 2023 - coinciding with a marked slowdown or even a recession in the United States - is to be expected.
The central bank supports the peso
If the economic situation had been promising for Mexico, the performance of this market would likely have been quite different without the Mexican Central Bank. Instead, throughout the year, it took the lead in the fight against inflation, stabilizing the peso and offering investors good reasons to stay in the market.
Since June 2021, there have been thirteen (!) increases in Mexican key interest rates. Enough to increase these last 4.0% at the time to 10.5% today. The purpose of the manoeuvre is to continue to provide investors with positive real bond yields (i.e. above inflation). This is enough to allow Mexico to attract capital at a time when most industrial markets in Europe and the United States are correcting their key interest rates but continue to offer investors largely negative bond yields in real terms.
When inflation peaked at 8.7% this summer, Banxico did not hesitate to increase the pace, with four increases of 0.75%, further reassuring investors. While inflation fell to 7.8% in November, the primary key interest rate was raised to 10.5%. This policy has borne fruit: many currencies have suffered heavy losses against the US dollar this year, amplifying the impact of the rise in imported prices (energy, raw materials) and causing inflationary surges.
On the other hand, the peso appreciated somewhat against the US dollar and gained almost 13% over the year against the euro. This appreciation was the main reason for the gains of European investors in this market.
An unusual stock exchange market
After a good 2022, the Mexican economy is expected to slow down somewhat as the US approaches recession or falls in and US demand for Mexican labour and exports dries up.
However, as the United States profoundly redesigns its supply chains and trade partnerships and seeks alternatives to China, much closer geographically, Mexico has many advantages. If it strikes its cards correctly, it should move towards a period of solid investment, growing integration of its economy with that of the United States and, therefore, stable growth. Something to improve the standard of living of Mexicans.
Consumer staples dominate the stock exchange in the country (35% of MSCI Mexico), where communications (21%) also play a significant role, driven by Carlos Slim's giant America Movil, which alone represents 17.5% of the Mexican market. This stock exchange is oriented towards the domestic market and should benefit from a new impetus for the country.
We remain in this market as part of our neutral and dynamic portfolios.
