A reform story gone awry
Investors in the world’s largest Spanish-speaking nation have had little reason to cheer in recent years. Trump’s election in 2016 unleashed the threat of protectionism.
Last year brought victory for left-wing populist Andrés Manuel López Obrador – known as AMLO – in the country’s own presidential election. Mexican equities have underperformed global benchmarks over the last five years.
AMLO has set about unpicking reforms of the country’s education and energy sectors passed by predecessor Enrique Peña Nieto, whose business-friendly administration was tarnished by corruption scandals.
One of the new president’s “first official acts” was to end construction of a “desperately needed new airport in Mexico City” that was already 30% complete, says Kenneth Rogoff for project-syndicate.org. Although he campaigned on a strong anti-corruption platform, AMLO’s administration has “eschewed competitive bidding for more than 70% of the contracts it has awarded”. Economic growth has also disappointed. Latin America’s second-biggest economy shrank 0.2% in the first quarter of this year.
Still, AMLO differs from a typical Latin American populist in one crucial respect, say John Paul Rathbone and Jude Webber in the Financial Times. He has promised to balance the budget and cut public-sector salaries, including his own.
That has “kept international investors sweet” so far. For all the “unorthodox politics” and “surface turmoil”, Mexico has relatively stable economic foundations, reckons Craig Mellow in Barron’s. Inflation has plunged 3% in the past 18 months to 4.4.% and “all-but-inextricable links” to US industry bring a measure of reflected economic dynamism.
If the trade standoff between Beijing and Washington really is the new normal, then Mexico is the “obvious base” for US companies seeking a low-cost destination to relocate their factories, adds John Authers on Bloomberg.
On a cyclically adjusted price/earnings (p/e) ratio – Cape – of 19, Mexican stocks are reasonably priced compared with other markets. With the tariff resolution helping the peso bounce off five-month lows, “there must be a decent chance of a rebound now”.