By Reshma Kapadia
Mexico is about to elect its first female president in a landmark election on Sunday that has two women contending for the top spot. The outcome could further bolster investors' interest in a country that is well-positioned to benefit from the U.S.-China rivalry. The iShares Mexico exchange-traded fund has returned an average 13% over the past three years, making it one of the better performers among emerging markets. But higher-for-longer interest rates in the U.S. and uncertainty around elections -- both in Mexico and the U.S. -- has contributed to a pullback of about 4% so far this year.
Fund managers see more opportunity ahead as Claudia Sheinbaum, the protégé of outgoing President Andres Manuel Lopez Obrador and former mayor of Mexico City, is widely expected to win the race against conservative opposition candidate Xóchitl Gálvez on Sunday. The matchup between the two women marks a first in Mexican history.
The Goldilocks outcome for the stock market is a solid win by Sheinbaum by a wide enough margin so the election isn't contested but not so wide that there are no checks and balances on spending, or that a disruptive agenda is pursued, threatening the autonomy of institutions. A win by eight percentage to 15 percentage points would be the sweet spot for markets, says Varun Laijawalla, co-manager of the $9 billion emerging markets equity strategy for global asset manager Ninety-One.
Sheinbaum is expected to continue many of the policies set out by AMLO, as Obrador is known by his initials. That continuity is comforting to investors who have been drawn to the country as it becomes a magnet for investment from companies -- including Tesla, General Motors, and Apple supplier Foxconn -- looking to diversify their supply chains, or near shore, as countries look to reduce their reliance on China.
Scheinbaum is also likely to continue the social programs AMLO spent money on into the run-up to the election, which should create a favorable backdrop for consumer-oriented stocks, says Capital Economics emerging markets economist Kimberley Sperrfechter via email. AMLO's spending on youth education and training, as well as universal pensions, marked a break from the relative austerity he followed through Covid to put the country in good fiscal health. But the increased spending has pushed up the deficit to 5% of GDP from 3.5%, leaving the winner on Sunday to navigate the need to rein in spending or increase taxes.
Proposals in recent weeks suggest that banks could be one target for tax increases, Laijawalla says. Also on the new president's to-do list: Improve energy and water issues and tackle crime and corruption to ensure Mexico continues to be a nearshoring magnet. Over the short-term, the risk to markets comes from a loss for Sheinbaum or a win that is too narrow and leads to a contested election. But past selloffs on domestic politics have been relatively short-lived and shouldn't meaningfully change what are still strong economic fundamentals, says Laura Geritz, founder of investment firm Rondure Global, who favors consumer-oriented stocks like those of Coca-Cola Femsa and tequila maker Becle S.A.B. de C.V., which gets 80% of its sales from the U.S., Mexico and Canada. In a note this week, J.P. Morgan strategist Adrian Huerta expects the Mexican stock market to rise closer to its bull-case target of 63,000, representing more than a 10% increase from current levels as the balance of risks tilt toward the positive given the likely election outcome, continued strength in the U.S. economy that feeds through to Mexico through increased trade, tourism and remittances and the trend toward bringing back production closer to home.
Laijawalla sees a pullback as a buying opportunity in companies that are well-positioned for shifting trade flows as Mexico replaced China last year as the biggest exporter to the U.S. -- a first in 20 years. These shifts have been a boon for industrial real estate companies like Fibra Uno Administracion, whose industrial parks are in the north of the country where much of the re-shoring activity is focused, says Laijawalla, who owns the stock and has about 6% allocated to Mexico. The facilities are bursting at the seams, operating at 100% plus utilization, compared with their historical 85%, and inquiries continue from companies looking for space. Yet the stock trades at about 50% of a discount to net asset value -- the same it always has yet the backdrop has meaningfully changed as trade flows shift, he says. The potential spoiler could come from the U.S. election. As campaigning gets further into swing, fund managers are bracing for more heated rhetoric around tariffs and immigration -- and talk of a rethink of the U.S.-Mexico-Canada trade agreement, or USMCA, that is up for review in July 2026. Policymakers have already started raising flags about increased Chinese investment in Mexico amid concerns it could be used to skirt trade restrictions on China. The relationship with Mexico under the first Trump administration was strained, raising concerns about what another term would bring. But increased efforts to reduce reliance on China makes Mexico a more critical partner. That may not tame the rhetoric or help with volatility, but it could mitigate the economic hit, especially as companies look to make long-term investments to rejigger supply chains. It isn't a bad set up for longer term investors out for a bargain.
Corrections & Amplifications
Varun Laijawalla is a co-manager of the $9 billion emerging markets equity strategy for global asset manager Ninety-One. An earlier version of this article misspelled his last name.
Write to Reshma Kapadia at reshma.kapadia@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
June 03, 2024 10:31 ET (14:31 GMT)
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