Close ties to a growing U.S. helps Mexico
We remain neutral overall toward emerging markets, but look for specific longer-term opportunities. Take Mexico, for example. It is closely connected to the United States, which is still one of the strongest performing DM economies and whose manufacturing data has remained in expansion this year, according to Bloomberg data. The U.S. dollar weakness, which we expect could continue, is a positive. The stabilization in oil prices (despite some selling after the vote) has also been a tailwind, given Mexico’s major exports are crude oil and vehicles. And let’s not forget, the country has been making some progress with reforms. Taken together, our long-term outlook for Mexican assets is positive.
Market Realist – Could Mexican stocks surge?
The Mexican (EWW) economy has been growing at a solid rate of 2.6%. Despite its industrial economy weakening in 2015, Mexico still managed to grow GDP by 2.5%. It was the strongest year in the last three, as GDP grew just 2.3% in 2014 and 1.3% in 2013.
In recent years, the correlation between Mexico’s economic activity and its industrial output has fallen, mainly due to the larger role of the service sector, which now makes up ~36% of Mexico’s economic activities. The service sector grew by 3.3% in 2015. The strength of the US (SPY) economy has also helped the Mexican economy, as 85% of Mexican exports end up in the US.
The Mexican inflation rate is well below the central bank’s target of 3%, at 2.5%, while consumer demand remains buoyant. The Mexican government has introduced major reforms to make growth more inclusive, reduce income inequality, improve the quality of education, and reduce poverty.