Tequila Sunrise
Written by David Ross, CFA, International Equity Manager, La Financière de l’Echiquier (LFDE) | July 2024
Why should investors look towards Mexico? Many factors make Mexico – one of the world’s largest producers of silver, copper, gold, zinc, oil and natural gas – an attractive destination for investors. As America’s foremost trade partner, Mexico is also one of the main beneficiaries of the restructuring of global supply chains, which are forming alongside those of China. With the world’s 10th largest population of over 127 million[1] – equivalent to France and Italy combined, the country’s GDP of 1,470 billion dollars is higher than that of Spain. And as in France, the UK and the US, the recent elections have caused much ink to flow.
The ruling party, and its candidate Claudia Sheinbaum, won a landslide victory in the Presidential elections on June 2nd. More worrying for investors, Morena won enough seats in the lower chamber of Congress to initiate its own constitutional changes. And was just shy of the two-thirds Senate majority needed to change the constitution. The possibility of deep change is creating uncertainty. And stock markets hate uncertainty.
Adding a little apprehension, out-going President Andrés Manuel López Obrador, popular for his anti-poverty programs, will not step down until October 1st, one month after the new Congress and Senate take office. This will give AMLO – as he is known – time to make major constitutional changes, without fearing the consequences.
These factors have created extreme post-election volatility. The Mexican peso lost 10% and the stock market fell sharply for two weeks. However, markets regularly make the same mistake with Latin America. They consider that a left-wing party victory implies a Venezuelan Hugo Chavez-style regime, including the nationalisation of private assets, hyperinflation and wiped-out investors. The reality is often different. While in 2022, the probability of Luna’s election in Brazil caused investors to panic – with the market shedding 80% between its peak in 2000 and the election – the facts have shown that Lula’s government was competent and that investing at the time of his election would have been a proven opportunity. Markets also seized up when Humala won in Peru in 2011, but here again, the competence of the government also generated opportunities. Finally, Mexico also provides its own example with AMLO’s victory in 2018. When markets corrected sharply following his election, overlooking his accomplishments when running the city of Mexico – notably in terms of tax collection efficiency, this was also an opportunity for investors.
As the former mayor of Mexico City, North America’s largest city with a population of over 9.2 million, Claudia Sheinbaum has followed in AMLO’s steps. By all accounts, her running of the city is deemed credible. A qualified engineer, she has written over 100 articles and two books on energy and the environment. Her political philosophy is not liberal, but her background and past achievements indicate that she is a sensible and competent manager. Her cabinet members are highly conventional types, which should help ease investors’ concerns. Rather than giving into the irrational fears triggered by her victory in the election, it seems investors would be better advised to leverage market volatility.
One of the golden rules of the team running Echiquier World Equity Growth – which epitomises LFDE’s conviction-driven approach with over 1 billion euros in assets under management – is to capitalise on exogenous corrections as long as corporate fundamentals remain robust.