I was a bit surprised last week when the Mexican peso appeared on the Bloomberg radar screen, that screen that 170,000 of us around the world have in front of us for much of our working day. The blip wandered into financial market airspace, triggering bells, whistles, and of course, Bloomberg ALERTS, that a new opportunity had presented itself. This opportunity from Mexico, our lovely neighbor south of the border, is for investors and traders alike, and for all those market analysts who had grown tired of writing and talking about China and were eager to write thousands of words of analysis and to talk at length about something (anything) new.
The Bloomberg headline last Tuesday announced, "Mexican Peso to Gain After Fitch Downgrade, Pimco Says" followed up nicely from an earlier headline late last month, "Latin American Bonds Attractive on Rates, Pimco says." It appears that PIMCO, the Pacific Investment Management Company with $941 billion under management, was making sure we all understood and appreciated that investing in Mexican bonds (for their relatively high yields) is THE NEXT NEW THING! The next new place to send your hard-earned investment dollars.
The rating downgrade by Fitch on Mexico's sovereign debt from BBB+ to BBB (which is still, importantly, an "investment grade" rating) was based on falling oil output and a swelling budget deficit due to the worst recession in Mexico since the 1930's. Fitch did, however, change their rating outlook from negative to stable, leading investors to believe the rating will not be lowered again anytime soon. That belief, coupled with the fact that the rating downgrade was highly expected, provided investors with a (seemingly) perfect opportunity to jump into Mexican bonds (I assume PIMCO was already in…with both feet).
The Mexican peso rallied on the Fitch news and to some extent on PIMCO's statement that the Mexican peso is now an attractive buy. They forecasted that the peso will rise by as much as 20 percent against the dollar over the next year because "the currency is one of the cheapest in emerging markets and exports to the U.S. are set to grow." They suggest that the peso is cheap by having compared it with 16 other major currencies and finding it the second worst performer against the U.S. dollar over the past year, after the Taiwanese dollar. I see where they are coming from, but don't entirely agree with their logic. It's just too simplistic. Anyway, here are some strong fundamental reasons why global investors should be attracted to Mexico:
- The Mexican peso is an independent, free-floating currency; it has been rallying against the U.S. dollar since the dollar peaked in February at 15.255 and it is currently moving in a well-defined trend towards the 12.00-12.50 level
- Mexican interest rates are attractive with short-term rates currently at 4.5 percent and looks set to move higher next year; sovereign bond yields are 7.8 percent
- The Mexican government is stable; President Felipe Calderón of the conservative National Action Party won the election in 2006 for a six-year term
- The government's efforts to stimulate the economy make good economic sense; their 2010 budget approved two weeks ago calls for spending of 3.2 trillion pesos and forecasts a budget deficit of only 0.75 percent of GDP
- Mexico is among the world's most open economies; it conducts more than 90 percent of its imports and exports under free-trade agreements (13 free-trade agreements with 40 countries, and is a member of both the WTO and NAFTA)
- Mexico is a commodity-rich country; it is the world's second largest producer of silver, the fifth largest of lead, sixth of zinc, eleventh of copper, and is a major producer of oil (their target is 2.7 million bpd), natural gas, coal and gold
- Mexico has the largest GBP per capita in Latin America
- Its GDP (nominal) is $1.143 trillion (compared to the U.S.'s $14.3 trillion and Canada's $1.5 trillion)
- According to Goldman Sachs, by 2050 the largest economies of the world will be China, India, United States, Brazil and Mexico
Here are a couple of factoids about Mexico unrelated to the financial markets that many of us north of the border may not know (but should):
- The official name of the country is the United Mexican States
- Its population is 108.6 million (the eleventh most populous country)
Finally, for those of us nature lovers, Mexico ranks high on our radar screen — first in the world in biodiversity in reptiles with 707 known species, second in mammals with 438 species, fourth in amphibians with 290 species and fourth in flora with 26,000 different species!
Que tengan un buen día y adios
The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates. This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.
Foreign exchange transactions can be highly risky, and losses may occur in short periods of time if there is an adverse movement of exchange rates. Exchange rates can be highly volatile and are impacted by numerous economic, political and social factors, as well as supply and demand and governmental intervention, control and adjustments. Investments in financial instruments carry significant risk, including the possible loss of the principal amount invested. Before entering any foreign exchange transaction, you should obtain advice from your own tax, financial, legal and other advisors, and only make investment decisions on the basis of your own objectives, experience and resources.