Mexico: an investor’s dream in need of critics
Debt capital market bankers and portfolio managers in New York covering LatAm struggle to find a bad word to say about Mexico it seems. That is a dangerous thing. The country riddled with risks and yet to show concrete signs of the growth on which investors are betting. Moreover, recent history shows that a healthy dose of scepticism should accompany any widespread hype in emerging markets.
Education, tax, telecoms and — most importantly for investors — energy reforms led Mexico to a triumphant 2013 in bond markets. The Central American nation knocked Brazil off its perch as the number one provider of new issues and Mexican spreads drifted well inside those of Brazil.
President Enrique Peña Nieto’s reform agenda appears to be an investor’s dream and Moody’s recognised this by surprising even bullish analysts with an upgrade to A3 earlier in February.
GDP growth of 1.3% in 2013 may not match the momentum felt in Mexican markets, but with the effects of the reforms expected to manifest themselves later this year, expectations for the next few years are high.
For bond markets, growth could mean more capital spending, more acquisitions and therefore a wave of new issuers to quench the thirst for the sparsely-populated Mexican high yield sector.
But signs of caution are badly lacking in the way bond bankers and investors discuss Mexico. Many appear to have forgotten — or are ignoring — that when future success stories are talked up too much, investors are often hurt.
Brazil’s OGX is the classic example of this, while EuroWeek warned in December that a tightening in yield from 18% to 11% in six months — as happened to Argentina’s 2017s in the second half of 2013 — could not be based on an assessment of fundamentals, but only on the herd mentality taking hold.
Of course, bond investors make their money jumping on rallies and predicting improving economic conditions before they happen, so it would be churlish to criticise them for attempting the same in Mexico.
Also Mexico, OGX and Argentina are three entirely different credits, and Mexico’s reform programme is tangible unlike OGX’s ability to extract oil or the noise surrounding supposed improved macroeconomic policy in Argentina. Just over a month after Argentina's announcements Argentina was at the centre of an EM crisis with its bonds and currency selling off rapidly.
The danger of hyperbole
Mexico runs the risk of setting itself up for a disappointment. Press coverage such as TIME magazine’s front page splash declaring Peña Nieto as Mexico’s saviour does little to dampen hyperbolic expectation.
Capital markets participants may not care for the ridicule that TIME’s flattering coverage of Peña Nieto received from the magazine's Mexican readers, and may be happy to dismiss criticism of the president’s opening up of the energy sector as leftist whining. But they would do well to study the reaction.
It is shocking to note how detached the mood of the markets is from the indignant one of those Mexicans reacting to TIME’s article. Corruption allegations and the judicial system continue to fall under scrutiny. Drug violence still terrorises parts of the country, with federal troops having to intervene to prevent vigilante self-defence groups taking over the western city of Apatzingan only last month. And Peña Nieto is carrying out his reform agenda having only received 38% of the vote.
Corruption, the rule of law and poor security are all things that seriously debilitate the economy and business environment and could harm Mexico’s resurgence.
And if Peña Nieto’s continues to face low approval rates, the reform agenda, which is yet to drive growth, could be handicapped. Indeed, Moody’s upgrade surprised analysts because it came before the secondary laws that should translate the reforms into a workable framework and legal processes have even been passed.
The way bankers’ eyes light up when Mexico enters the discussion would have you believe they were ignorant of these issues amid the excitement of having new Pemex partners to think about.
That is not to say that Mexico’s reforms will fail, nor that there is not reason for investors to be optimistic. Rather, it is a reminder that, firstly, the excitement is yet to yield concrete results. Secondly, it is highly risky not to discuss such chronic socio-political instability when talking about investing in Mexico.
We must not lose sight of the fact that Mexico remains very much an emerging market prone to the kinds of political and social volatility that could affect financial markets.