For a long time now, Mexico has had a rotten stock market but great bond market.
iShares MSCI Mexico
exchange-traded fund (ticker: EWW) has lost more than 20% over the past five years, compared with a 48% gain for global emerging markets and 75% return on the S&P 500 index. Mexican sovereign bonds, by contrast, have seldom yielded less than 6% for a 10-year note, while the peso has held more or less steady against the dollar.
The country has been through tumult over the past two years, with a leftist president taking power, a calamitous collision with Covid-19, then a rally on vaccine-driven optimism. But not much has changed in market terms. Among emerging markets, Mexico is still a magnet for fixed income, yet so-so at best for equities.
“The bonds are looking more attractive than many others in EM,” says Yung-Yu Ma, chief investment strategist at BMO Wealth Management. “Stocks are a little more of a mixed picture.”
For a country of 126 million on the doorstep of the U.S., Mexico offers a surprisingly stodgy roster of stocks. The closest thing to a prominent tech name is telecom provider
(ticker: AMX). The rest of the index is dominated by old-school consumer companies like
Wal-Mart de Mexico
Grupo Financiero Banorte
(GFNORTEO.Mexico). These proved unalluring as Mexican gross domestic product growth slumped to zero even before the pandemic.
Andres Manuel Lopez Obrador’s
response to the coronavirus hasn’t helped matters. Mexico ranks ninth in the world in Covid deaths per capita. But AMLO, as the leader is known, has been uniquely stingy in offsetting the economic effects, sticking by his ideology of “republican austerity.”
His economy is projected to contract by 10% this year, compared to 4% in freer-spending Brazil. Official poverty has risen from 35% to 44.5%, observes
the Mexican-born co-founder of LM Capital Group. “People are starting to steal because they can’t feed their kids,” he says.
The contraction digs a deeper hole for consumer companies to climb out of next year. Mexican stocks jumped more than 20% in the past month on encouraging vaccine news. But they may struggle to advance further. “We see less room for a further rerating in stocks,” says Gabriela Soni, chief investment officer for Mexico at UBS Global Wealth Management.
AMLO’s tight wallet is positive for bond investors, though. Mexico has maintained a positive current account balance, is bulging with currency reserves, and secure for now in its investment-grade credit rating.
A hawkish central bank pitched in by holding rates at 4.25% last month, which translates to a 5.7% yield on 10-year peso bonds. That’s impressive if the currency holds near current levels around 20 to the dollar, as investors expect. “With markets returning to the hunt for yield, Mexico still looks attractive,” says Ilya Gofshteyn, senior emerging markets macro strategist at Standard Chartered Bank. He is targeting 19 pesos per dollar by next March.
Mexican stocks are still cheap historically, priced at 14 to 15 times expected earnings against an average of 16 to 17, points out Daniel Gewehr, head of Latin American equity strategy at Banco Santander. And AMLO might ramp up spending ahead of midterm elections in June, juicing growth and ruffling fixed-income investors. But for now it looks like the same-old in Mexico: Buy bonds, not stocks.