Adios Mexico – for now
Now that the investment case has played out, I've caught up with an economist, a strategist and a fund manager as they say adiós to Mexican assets.
Starting with a quick recap: Erik Lueth, one of our emerging market economists, identified Mexico as a potential attractive investment opportunity, even though on the surface it appeared to be challenged from several angles:
1) Short-term economic headwinds
2) NAFTA renegotiation trade risks
3) Political risks, from in particular the domestic presidential election
At the time, these factors had triggered a sell-off in Mexican equities and currency markets. However, he thought the sell-off was overdone, and looking beyond the short-term factors we had reason to be positive on the Mexican economy over the medium-term.
Lars Kreckel, our Global Equity Strategist, analysed the Mexican stock market and agreed it was a good time to invest. The sentiment towards Mexico was very negative and it had underperformed other emerging markets sharply, so it stood out on our deep value screen and he argued there was a strong case it could be a catch-up story.
Off the back of this we introduced Mexican equities as a position in some of our portfolios, and since then it has played out as expected, so I have touched base with the Erik, Lars and Willem Klijnstra – one of our fund managers – to provide an update on the situation.
¿Qué pasa, México?
The economist view – Erik: As expected the fears around President-elect Andrés Manuel López Obrador seemed to be overdone – he did win the election but has made a positive start, showing himself to not be an extreme ‘lefty’. While on the NAFTA renegotiation and current trade wars we expected a deal in the end, though with uncertain timing, as is now being finalised.
The strategist view – Lars: The poor performance has largely reversed through a combination of a pick-up in Mexican performance and weak emerging market (EM) performance. Sentiment has picked up a lot and Mexico has become the most popular EM country on a number of sentiment/positioning indicators.
The fund manager view – Willem: When implementing the position in portfolios we took into consideration that going long Mexican equities made us implicitly short technology versus the broad EM universe. So, we paired the trade with an investment in the Nasdaq index to balance out the lack of tech, which worked really well as illustrated below:
We continue to have a positive medium-term view on Mexican assets, including a currency that is still deemed to be around 10% cheap:
But with some of the near-term drivers having dissipated, the shorter-term case to hold Mexican assets has weakened so we have started to dial down our tactical positions.
This investment case is not only a great example of how our dynamic asset allocation process flows through the economists, strategists and fund managers, but also how we use behavioural biases within our investment ideas. As John Roe explains in his debut LGIM Talks podcast we have played on other investors' availability and recency biases here whereby they were putting too much emphasis on the negative short-term news, overlooking some of the longer term positive factors.