Given the tense situation between Mexico and the U.S., the emerging market faces significant challenges. MainFirst's Cornel Bruhin says investment opportunities in the energy and financial sectors can be found there, relatively independent of the U.S.
A new president, low growth in the first quarter of 2019 and tensions with the U.S. over immigration and trade: Mexico faces a number of challenges. Not least in view of the tense situation with the USA, many investors are currently rather negative about the markets in the Latin American country, says Cornel Bruhin, fund manager of the MainFirst Emerging Markets Corporate Bond Fund Balanced. However, he still sees interesting investment gems in Mexico – especially in the energy and financial sectors: "Oil and gas, electricity and finance are only slightly influenced by the US economy. Tourism as well as export business can even benefit from a weaker Mexican peso, as services and goods are mostly paid for in U.S. dollars, but their operating costs are in pesos", Bruhin points out. Thus, if you know the companies well, there may even be opportunities to expand positions.
In addition, the U.S. and Mexican governments have reached an agreement based on a deal negotiated over the past several months. Even if Trump threatens tariffs again, he said they are unlikely to be imposed. Because they would hit U.S. consumers significantly, and the U.S. auto industry would suffer especially, Bruhin said. In addition, Mexico is the third largest trading partner of the U.S. and tariffs would also jeopardize the new United States-Mexico-Canada Agreement (USMCA), he adds.
Heavyweight among emerging markets
Overall, he says, Mexico is increasingly becoming a heavyweight among emerging economies. Its gross domestic product was $1.2 trillion in 2018, putting the country in 15th place, just behind Australia at $1.4 trillion. Mexico is also one of the big players in the export business and has free trade agreements with 46 countries, more than any other country. It produces and exports the same amount of goods as the rest of Latin America combined, and: "Mexico's main exports are not raw materials, but manufactured goods such as cars, electrical appliances and computers.", Bruhin emphasizes.
In recent years, he said, many reforms by the previous president, Enrique Pena Nieto, helped reduce dependence on oil – it used to be ca. 40 percent and now only 20 percent of government revenues. The new President Andres Manuel Lopez Obrador, or "AMLO" for short called, wants to drive this development and plans to build two new refineries, renovate six existing ones and spend 4 billion. Provide U.S. dollars for new exploration. "These investments are urgently needed to restore margins and boost production", explains Bruhin. AMLO's goal, he said, is to increase production from the current 1.9 to 2.5 million barrels per day within two years.
Investment opportunities in Mexico that are relatively independent of the USA can be found, for example, in the energy sector. The company Saavi Energia is the fourth largest independent energy producer in Mexico and has been active in the market for over 20 years. The majority are commercial and industrial customers, 92 percent of whom remain in Mexico. This makes cash flows quite stable and predictable. The yield on the recently issued bond is currently 6.3 percent.
The financial sector is also home to interesting, innovative financial companies such as AlphaCredit and Unifin Financiera, which give borrowers access to credit online and generate returns of over 10 percent. "As active managers and value investors, we keep seeing gems here and will analyze whether we can use the tensions as buying opportunities", says Bruhin.