30 May 2024. Mexico is a compelling proposition at present, given it has both cyclical and structural supports at play. Mexico, along with India, has been a huge beneficiary of friend-shoring, at the expense of China.
Figure 1 shows that Mexico has now overtaken China as the largest trading partner with the US, and current momentum would suggest China will be further marginalised in this ever more polarised world. Ever since the pandemic peak in 2021, when US consumers were stuck at home and buying Chinese-made laptops, toys, COVID tests, home exercise equipment etc, imports from China have been on a steady decline, fuelled by years of political tensions.
Mexico now boasts greater appeal in certain industries, such as electronics suppliers and global auto manufacturers, with industrial utilisation nearing full capacity. Structural shifts like these don’t come around often, so the importance of this rebalancing to Mexico shouldn’t be taken lightly.
Figure 1: Largest trading partners of the US
Source: Ninety One, Bloomberg, 31 December 2023.Latin America can be accredited with first-mover advantage in terms of monetary tightening over the past 18 months as it sought to tame inflation across the continent. This also meant it was the first to loosen and cut rates. In contrast, most developed market central banks are yet to cut rates, although rate cuts are expected in 2024. In Mexico, rates were cut for the first time in March to 11.00%, down from a peak of 11.25%, where they spent most of 2023. With the year-on-year inflation figure hovering around 4.5% the real interest rate is around 6-7%. This leaves the Mexican central bank with growth levers to pull should it need to, which should provide future tailwinds for equity markets. With this in mind, our current weighting to Latin America is the largest it has been in over four years. We are also bullish on Brazil which, just like Mexico, has room for rate cuts.
Presidential elections in Mexico take place in June this year and while current president AMLO can’t seek re-election, his approval rating is important for broader sentiment towards the party itself. What is perhaps of greater importance is the upcoming US election. While it’s still very early in proceedings, a Trump victory could quite easily lead to further deterioration in relations with China, which could play nicely into the hands of Mexico. But counter to that, we’re just as likely to hear more talk of US protectionism, so it’s hard to see how this all plays out just yet.