Mexico can thrive despite President Trump
Fears over the impact of US protectionism hit Mexican financial markets earlier this year. But the threat may not materialise – and Mexico’s long-term prospects appear bright.
When Donald Trump was elected President of the United States last November, financial markets around the world panicked and fell sharply overnight, but soon recovered their losses.
Mexican assets however, didn’t. Its currency, the peso, slid to a record low against the US dollar in the wake of the election, but fell to a further record low in January.1 It was down over a fifth since the beginning of 2016, when Trump started leading the race to be the Republican candidate.
No wonder. Donald Trump has threatened to impose a 20% tax on Mexican imports to the US to pay for a wall on the border between the US and Mexico. He also pledged to tax or halt the $25 billion in remittances that Mexicans working in America send home each year.2 He has said he wants to renegotiate the North American Free Trade Agreement (NAFTA) between Canada, Mexico and the US, which was established in 1994.
If these measures are implemented, the Mexican economy could suffer a major blow. But in the past two months, investors have gradually recovered their confidence in Mexican assets. Indeed, the peso has bounced back, recovering all its post-election losses, and Mexican stocks have hit a record high.3
Investors may have concluded that Trump’s bark is far worse than his bite, and Mexico is hardly the only region that could suffer from US protectionism: China, Canada and Europe are also vulnerable.
Mexico may also be an appealing investment destination. As an emerging market, it poses higher risks than other developed regions. However, it could offer opportunities to brave long-term investors as part of a diversified portfolio.
Just remember that there are no guarantees. Investments can fall as well as rise and you may get back less than you invested.
It may never happen
Donald Trump’s protectionist policies threatened to do huge damage to the Mexican economy, which is highly dependent on its neighbour.
Exports to the US comprise 25% of GDP and the trade between the two countries is worth $580 billion a year.4 NAFTA, moreover, has bolstered foreign direct investment, which has risen to 2.6% of GDP per annum since it was signed. The figure was previously just 1.1% a year.5
NAFTA also helped Mexico develop a highly competitive manufacturing sector: lower tariffs, proximity to the US, and well-educated workers, who are cheaper than China’s,6 added up to an appealing package.
Nevertheless, the Trump administration adopted a more conciliatory tone towards Mexico early this year, suggesting that Trump’s campaign threats are hardly a foregone conclusion. His top trade adviser, Peter Navarro, talked of a manufacturing “powerhouse” comprising the US, Mexico and Canada.7
This suggested that any US efforts to change NAFTA would not necessarily be purely to Mexico’s disadvantage. However, details of any planned American changes to the agreement have yet to emerge. Similarly, US commerce secretary Wilbur Ross said that a “sensible” deal between the US and Mexico could bolster the peso.8
Investors have also taken note of Trump’s failure to pass a healthcare package, and concluded that rhetoric will not automatically translate into reality. The broader hope is that Trump’s advisers will clearly spell out that a potential trade war triggered by US tariffs and subsequent retaliation would harm the US economy too.
Any taxes on US goods or remittances, meanwhile, are likely to be counteracted by an accompanying fall in the peso, making Mexican goods cheaper and boosting the purchasing power of those receiving remittances. This will temper the economic impact.
Mexico has plenty of potential
Amid the worry about what Trump might or might not do, investors have overlooked the fact that Mexico is becoming ever more attractive to international investors.
In 2013, it amended the constitution to privatise its oil industry, ending 76 years of state ownership. Attracting capital and expertise from abroad to the Gulf of Mexico and its shale fields should help it exploit oil reserves that some experts reckon could be greater than Russia’s.9
What’s more, opening the oil sector is just one part of a comprehensive package of reforms the government under President Enrique Pena Nieto has been able to implement in recent years. A shake-up of the tax system, notably closing loopholes, has ensured that the tax take, once the lowest in the developed world as a proportion of GDP, has improved.10
The telecoms, broadcasting and banking sectors have been liberalised to bolster competition, which should help lower costs for local companies and attract foreign investment. In the 1990s, Mexico suffered from hyperinflation and currency instability. Today, inflation is just over 5%,11 while the government has attempted to keep a lid on spending and borrowing in recent years.12 Government debt is worth 43% of GDP,13 compared to 80-90% in Germany, France and Britain.
Mexico’s demographics also suggest a bright long-term future. Forty-five per cent of the population is under 25 years old,14 implying an expanding working population and scope for consumption to expand, and the population is relatively well educated. Mexico is the world’s eighth-best performer when it comes to producing graduates in engineering, manufacturing and construction.15
How Barclays can help
With the Trump administration looking less likely to live up to its initial sabre-rattling, and the possibility that it could lose office in 2020, investors have adopted a positive long-term view of Mexico. They could also benefit from the continued recovery in the peso, as their investment would then be worth more when translated back into other currencies.
Keep in mind, however, that Mexico is an emerging market. These are riskier than their developed-country counterparts because their economies and political systems tend to be less stable. If Trump does impose punitive measures on Mexico, its markets could fall sharply.
Note that emerging markets in general are especially vulnerable to US protectionism and any retaliatory measures, because they typically depend more on global trade than the industrialised world. China has also been singled out by the Trump team for supposedly indulging in unfair competition against America, so its assets may be especially volatile. In the developed world, Europe is the most trade-dependent region, so it could bear the brunt of the decline in global activity if a trade war erupts.
Investors can gain access to Mexico through the Blackrock iShares MSCI Mexico Capped UCITS exchange-traded fund (ISIN: IE00B5WHFQ43).
You could also spread risk by opting for partial exposure to Mexico through a regional fund, such as the Neptune Latin America, in which Mexico accounts for just under a fifth of overall holdings (GB00B909HH53). A general emerging markets fund will spread investments beyond the region. One example is the F&C Emerging Markets (GB00B5463542), with Mexico comprising 10% of the fund.
Bear in mind that past performance is not an indicator of future performance. All investments can fall as well as rise and you may get back less than you invested. The value of international investments may also be affected by currency fluctuations.
Please also note that our referring to these investments does not constitute advice or a personal recommendation to invest in these or any other investment. You can find other investments focusing on similar sectors of this type on the Barclays Stockbrokers Funds Market.
We do not provide investment advice. If you’re unsure whether an investment is right for you, you should seek independent advice.
1 Reuters, Mexico's peso hits record low on Trump talk of wall, auto tax
2 CNN, Trump threatens Mexico's biggest cash source
3 Financial Times, Mexico’s economy is humming along – despite Trump
4 Trading Economics, Mexico Exports
5 Financial Times, How uncertainty became the ‘new normal’ for Mexico
6 Financial Times, Want cheap labour? Head to Mexico, not China
7 Financial Times, Peso rises after Navarro says he sees ‘opportunity’ with Mexico
8 Financial Times, How uncertainty became the ‘new normal’ for Mexico
9 The New American, Mexico’s Huge Oil Reserves Now Open to Private Exploration
10 The Economist, Enrique Peña Nieto has achieved a lot. Now his government needs to maintain the momentum
11 Bloomberg, Mexico Raises Rate as Inflation Hits Highest Since Recession
12 Reuters, Mexico scrambles to cut spending under shadow of credit downgrades
13 Trading Economics, Mexico Government Debt to GDP
14 Index Mundi, Mexico Demographics Profile 2016
15 Mexico IT, mexico become world leader engineering computer science graduates
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Investments can fall in value; you may get back less than you invest.