Wealthy Nations Daily Update - Mexico

Migration between Mexico and the US seems to be picking up again; at least in terms of southwards repatriations, which outstripped chasers of the American Dream by 140,000 between 2009 and 2014, according to a report from the Pew Research Center. Yesterday’s paper reported that over a million Mexicans migrated from the US, over the 5 year period, to reunite with their families and build a life in the invigorated Central American economy. Only 870k successfully migrated in the other direction as business more associated with Mexican employment opportunities experience a slower recovery than the broader US growth.

Mexico seems to have got more bad press of late than perhaps it is due. As the thin slice sandwiched between the bolstered US economy and the flagging commodity dependent Southern American countries it almost always gets bracketed with LatAm economies in a de-risking environment. But what many forget in their indiscrimination, which the million Mexican homecomers perhaps haven’t, is that the Mexican economy is more correlated with that of the US than any other (as most evident in 2009). Just like its landmass, it is more connected with the north than the south. Even Canada’s economy is less correlated with its continental neighbour despite it being much more analogous in other ways. Oil exports in both Canada and Mexico only account for around a quarter of GDP dropping to around a fifth next year.

The Mexican economy is projected to pick up growth to around 3% for the next couple of years (but could quite conceivably approach 4%) and will benefit from the strong US economy and the fruits of the many successful reforms that the Mexican government have undertaken. Investment is accelerating along with manufacturing, incomes and consumption, and greater competitiveness is being allowed in various industries. The Mexican Government has been driving reforms addressing everything from budget deficits to environmental challenges and contrasts sharply with the impasse prevalent across other emerging and developed economies alike. Although the lower oil prices will put strain on some of these ambitions the continuing oil block auctions seem to be having sufficient success and the past year’s reform successes are reassuring.

Although Mexico was upgraded by Moody’s to A3 in February of 2014 it also had its rating band raised to A1-A3 meaning that it currently still resides at the low end of near term rating potential. As such we deem it fairly likely for the country to receive an upgrade in the foreseeable future despite broader EM concerns many of which do not apply or directly impact the Mexican relative success story. Mexico, though not as cheap as Brazil et al., offers much greater value and much less stress. The government owned Pemex offers a significant spread over the sovereign bonds and benefits from sovereign support - but with appreciable autonomy to act more commercially than other infamous state owned oil companies in LatAm. We continue to hold some of its debt and actively review the region for more value and for eventual market and credit rating recognition of the contrasting trend in Mexico that the migration story seems to epitomise.