How Mexico Elections Could Affect Portfolios

December 14, 2017

This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today’s article features Brad Jensen, managing director and senior portfolio manager with Accuvest Global Advisors.

Investors, it’s time to pay attention to Mexico.

In the course of our more than 50 visits to Mexico this year alone, and 33 years focused on the economic and financial environment in the country, it is clear to our firm that Mexico is at a critical juncture, and its presidential elections next year will be the determining factor for which way Mexico turns, politically.


Unfortunately, rhetoric coming from President Trump has weighed greatly on the populace, going a long way to aid the populist candidate. If the elections were held today, there is little doubt that the radical populist Andres Manuel Lopez Obrador (AMLO) would be elected and the result could be quite negative.

In our most recent trip, we spent time with a few candidates, and were on hand for the announcement of the Institutional Revolutionary party’s official candidate, Jose Antonio Meade. In a normal cycle, these individuals would be viewed as relatively strong candidates and possible leaders. In the current environment, however, the country is fixated on the negativity coming from Washington related to trade generally and NAFTA specifically.

Investment in the country has slowed, and risks are rising. Foreign direct investment has dropped from $3.9 billion for the 12 months ending Dec. 31, 2012 to $491 million for the 12 months ending Sept. 30, 2017.

Fortunes have been won and lost in the extreme environments seen in Mexico over time. Crises have wiped out wealth for many, while others have built empires. Now is the time to tune in your scanner; attentiveness to the issues at hand is imperative.

Our view currently is to be naked any exposure to Mexican assets. This has been beneficial, as the momentum of the MSCI Mexico Index has significantly underperformed other markets in the ACWI (second-worst USD price return over the last three months, down 11.4%). 


Mexico Returns Blog

Sources: Bloomberg, Accuvest


For a larger view, please click on the image above.


Over the course of the next 12 months, however, there may be a chance to take positions that could reward long-term portfolios. One way to play this election opportunity and gain exposure to Mexico is through an ETF. We currently prefer the iShares MSCI Mexico Capped ETF (EWW).

We are trying to thread a tight needle with our outlook, but the view driving our strategy contemplates AMLO winning the election on July 1. Given the stakes and potential loss of power of the ruling party, there could be considerable upheaval and asset price discounts if the election is contested and results not final for a period of time.

The markets will have awoken to this possibility leading into the election, and will begin talking about the outcome being a Chavez-lite result. Already-cheap markets would look even cheaper in this scenario.


The current price-to-earnings ratio (P/E) for Mexico is 16.8x. This P/E ratio is 6.4x less than Mexico’s five-year average P/E ratio of 23.2x, and represents the largest “discount” of all the countries we follow in the ACWI. But Mexico’s current valuations (versus its own history) suggest that a good portion of political risk has already been priced in.

Without trying to pick the bottom, we will build meaningful positions at these lower levels given a fairly broad and time-insensitive view. While conditions are different than Brazil in 2002, the general panorama in Mexico could be similar to the Lula election, with Brazil stocks down nearly 80% in USD terms going into the election, but sprinting over 1900% in USD terms to the upside over the course of several years. 


Brazil Returns Blog

Sources: Bloomberg, Accuvest


For a larger view, please click on the image above.


We believe AMLO is likely to roll back energy reform, push hard against the U.S. while looking for new partnerships—including exiting NAFTA, which would place Mexico under WTO rules, which would be more favorable for Mexico—and raise taxes significantly on the rich. But he will be attentive to the economy broadly. The country has always benefited from a weak currency and its proximity to the U.S., which will perhaps pay off nicely under WTO rules.

Companies will have the ability to grow earnings. Currently, due to the uncertainty, the market is overlooking very strong expected earnings growth.

Consensus forecasts suggest EPS growth of 23.8% annually over the next three to five years, outpacing the expected earnings growth of 13.1% for the average country. If AMLO takes power smoothly and uncertainly declines, Mexico’s high growth potential and attractive valuation will attract global investors and support asset prices.

Mexico is 0.4% of the ACWI. This is not a market that will make or break your year if you have a global mandate. The moves could be big enough, however, that keeping a close eye on the political scene in 2018 could improve your ability to outperform next year.

At the time of writing, Accuvest held positions in EWW. Accuvest Global Advisors (AGA) is a registered investment advisor based in the San Francisco Bay Area. For more thought leadership and firm updates, visit; or email [email protected]. For a list of full disclosures, please click here.

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