Some Investors See Mexico’s Sell-Off As Bargain

After financial markets and the peso have been routed since Trump’s election, value investors lurk.

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Reviewed by: Dion Rabouin
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Edited by: Dion Rabouin

New York/London (Reuters) – A little more than a week after Donald Trump’s surprise election victory, a growing number of emerging market fund managers are saying a sell-off in Mexican assets may represent a buying opportunity.

Mexican stocks, currency and debt have been hammered since Trump’s surprise victory last week, fueled by concern about the U.S. president-elect’s campaign promises to renegotiate or scrap the North American Free Trade Agreement (NAFTA).

The Mexican rout was the most dramatic part of a wider emerging market slide that reflected not just anxiety about Trump's anti-trade views but also the prospect of higher U.S. yields stoked by increased stimulus under the new administration.

Trump May Be More Pragmatic

But some emerging market investors are expecting a bounce-back, betting President Trump could be less inclined to implement protectionist trade policies than candidate Trump.

“Our base case is that President-elect Trump will be more pragmatic relating to trade and immigration,” said Chuck Knudsen, emerging market equity portfolio specialist at T. Rowe Price. “We think he’ll try to find ways to work within NAFTA."

The prospect of introducing mass changes in U.S. trade policy will prove much more politically and economically complicated than the president-elect realizes, said Mark Burgess, chief investment officer of Columbia Threadneedle Investments, adding that he viewed Mexico as a “buy” for the long term.

Trump also has more “low-hanging fruit” to focus on domestically, including proposals for infrastructure investment and tax cuts, repatriation of corporate assets and overhauling regulations, says Alejo Czerwonko, director of emerging market investment strategy at UBS.

Lowest P/E Ratio Since August 2015

Even in the short term, some investors see Mexico as ripe for bargain-hunting, with the MXSE IPC index's price-to-earnings ratio at its lowest since August 2015, according to Thomson Reuters Eikon data.

“I would buy now absolutely—with a 2017 perspective,” said Didier Saint-Georges, a member of the investment committee at Carmignac Gestion, speaking at the Reuters Investment Summit in London. “It could well be the top-performing emerging market next year for all I know.”

Though many investors appear bullish, such views are far from unanimous.

BlackRock's Global Chief Investment Officer of Fixed Income Rick Rieder, whose firm last year upped its emerging market exposure, now says he is stepping back from the asset class as a whole.

FIS Group’s chief investment and chief enterprise officer Tina Byles Williams said Trump’s “notably fluid” positions have taken her from neutral on emerging markets to underweight.

 

Emerging Market Investor Demand Slows

Lipper data showed on Thursday that inflows to emerging market equity funds declined to the lowest level since August 2015, and emerging market debt funds saw their largest withdrawals on record.

If Trump were to actually implement his campaign promises, “there’s downside from the perspective of any [Mexican] asset class you look at,” Czerwonko said.

That worry helped Mexico’s peso fall as much as 17% to an all-time low after Election Day. Mexico’s economy was already plagued by shrinking growth rates and sagging oil revenues, making its currency one of the world's worst performers even before Trump's victory.

The sell-off has roiled all of Mexico’s financial markets, with the BMV stock exchange falling more than 7% since the U.S. election, touching its lowest level since June. The dollar-denominated MSCI Mexico Index has plunged as much as 19%.

Weak Peso Means Cheaper Labor Costs

Still, the slide in the peso, down 12% since the election, will bolster the Mexican economy by reducing the price of labor, Saint-Georges says.

“The Mexican economy is today more competitive than it was a year ago,” he said. 

Some investors are putting such views into action. U.S.-based funds investing in Latin American stocks netted $672 million in cash during the weekly period through Nov. 16, the most since September 2013.

The $1.7 billion U.S.-listed iShares MSCI Mexico Capped ETF (EWW) attracted the most money among funds in that category, sweeping in $627 million for the week, despite losing more than 15% since Election Day.

 

Chart courtesy of StockCharts.com

 

Javier Murcio, senior sovereign analyst for emerging market strategies at Standish, a division of Bank of New York Mellon believes even if Trump does intend to scrap NAFTA, Republicans in Congress would be reluctant to get onboard.

"Even a more radical call from the Trump administration to repeal NAFTA in practice will really mean open negotiations to change or update certain areas," he said.