Mexico Could Be a Haven From Global Volatility

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You might think that markets would freak out over a big political win for a Mexican president who reviles corporations and champions state monopolies. They didn’t.

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Andrés Manuel López Obrador’s Morena party took four of six governor’s races on June 5, making it the strong favorite to capture the presidency again in 2024. “It’s very difficult to see anyone beating a Morena candidate,” says Duncan Wood, senior adviser to the Wilson Center’s Mexico Institute. AMLO, as the current leader is known, is constitutionally limited to a single six-year term.

Investors shrugged, treating Mexico more like a haven from global volatility than a nation taking a hard left turn. The

iShares MSCI Mexico
exchange-traded fund (ticker: EWW) is close to flat this year, while global emerging markets and the S&P 500 index are both down 14%. The peso has gained 4% against the dollar.

One reason markets feel relaxed is that AMLO lacks the parliamentary supermajority he needs to enact his most antimarket reforms. Opposition lawmakers beat back a scheme that would have renationalized much of Mexico’s power industry.

But the 68-year-old president also has been surprisingly successful in combining popular social largess with a tight fiscal belt, a mixture he labels “republican austerity.” Half of Mexico’s 130 million citizens have benefited from either cash transfers or minimum wage increases since AMLO took office in 2018, Wood estimates. The president found extra cash by collecting back taxes and cutting state salaries, among other means. He refrained from stimulus to counter the effects of Covid.

AMLO has also backed a hawkish central bank, which kept interest rates relatively high during the pandemic and was quick to hike when inflation reappeared, notes Aaron Gifford, an emerging markets sovereign analyst at T. Rowe Price. The result: relatively tame inflation around 7.5%, compared with 12% for Brazil, and a robust peso to lure fixed-income investors. “Austerity is killing growth, but it’s kept the peso intact,” Gifford says.

With equities, investment fashion is shifting toward Mexico’s established blue chips with reliable profit streams and minimal risk of disruption. Mexican banks, in particular, have plenty of expansion headroom even without gross-domestic-product growth. Two-thirds of the population remains unbanked, and less than 5% hold mortgages, says Malcolm Dorson, Latin American portfolio manager at Mirae Asset Global Investments.

With no real domestic start-up competition, top incumbent

Grupo Financiero Banorte

(GFNORTEO.Mexico) is in pole position to grab that real estate, he says. The same goes, Dorson thinks, for retailing giant

Wal-Mart de Mexico

(WALMEX.Mexico), which continues to mop up mom-and-pop shops and is battling for e-commerce supremacy with Argentina-based

MercadoLibre

(MELI).

Investors are “not overly worried” about either of AMLO’s likely successors: Mexico City Mayor Claudia Sheinbaum and foreign minister Marcelo Ebrard, says Pablo Riveroll, head of Latin American equities at Schroders. “These are technical people who understand the macro economy,” he says.

Not that nothing could go wrong with Mexico’s stable picture. A U.S. recession could whack both exports and remittances, which account for about 4% of GDP. AMLO could bust his own republican austerity, rushing to finish dubious pet projects like the $12.5 billion Dos Bocas oil refinery or $9 billion Maya Train connecting southern resort areas.

For now, though, a little Mexico in the portfolio might calm the nerves. “Mexico is a defensive market with no important macro imbalances,” Riveroll says. Not too many of those around. b