With Brazil under pressure, international investors are concentrating on opportunities in Mexico to boost portfolio returns.
Thomas Smith, lead manager of the Neptune Latin America fund in London, said: “For years Mexico has taken a back seat within Latin America as Brazil has been one of investors’ favoured markets. Now Mexico is set to enjoy a period of growth acceleration.”
According to Smith, the performance of the Mexican market has shadowed that of wider Latin American countries, with the acceleration of GDP, continued reform momentum and the resilient currency all contributing to the attraction for investors.
Henderson Global Investors’ Nick Cowley, manager of the firm’s Emerging Market Opportunities fund, told Emerging Markets that it is the action of the government that is resulting in the change of focus for many investors.
“In contrast to most of the LatAm countries and EM countries for that matter, the reform is happening. There have been some huge changes in energy and labour reform. In the short term it has been painful, leading to low GDP growth, but it really increases the long term GDP potential,” he said.
“We are really positive about that and looking for more ways to play the reforms that are happening in Mexico and a rebound in the economy going forward. “
Mexico’s president Enrique Peña Nieto announced a number of reforms in the summer of 2013, including an ambitious National Infrastructure Plan which included $300bn of planned spending during his five year term.
Smith said: “Economists believe these reforms could increase potential GDP growth in Mexico from 3.5% up to 5%-6%. While increased labour flexibility could add up to 70bp, with an additional 20bp-30bp coming each from telecommunication and financial reforms, the major boost to growth is expected to come from the energy reform, which could add over 100bp to potential growth.”
He added, however, that increased investment will be the ultimate driver behind Mexico’s continued success.
“The private sector has been shut out of the energy sector for 75 years following nationalization in 1938, and as a result investment has been insufficient and in recent years production has been in decline – crude oil production has fallen by a quarter from its peak a decade ago,” he said.
“Early estimates suggest that investment to GDP could rise from 20% to 28% over the medium term as a result of greater investment in the energy sector and through Mexico’s increasing competitiveness attracting investment in export industries.”
Investors are also focusing on other Latin American markets such as Columbia and Peru.
“There is some potential for mining in [Colombia] that has been under-exploited as a result of the security problems they have had in the past,” Cowley said. “You couldn’t get to parts of the country previously because it was too much of a risk. “The infrastructure potential is huge also – it is a country with three mountain ranges and a poor quality road network making it very difficult to transport things around the country, even to the ports. The country could really be opened up to exports and imports much more once more has been spent on infrastructure.”
And Mike Simpson, head of Barings’ Latin America equities team, added: “I wouldn’t be surprised if Columbia has the best growth in Latin America this year.”