For Wall Street, Mexico Is Great Again

By Kenneth Rapoza

Mexico has a lot of well-known problems. Drugs. Poverty. Corruption. And on the corporate side, low-levels of production outside of the major multinational owned manufacturing firms. But despite the campaign rhetoric to build a wall and to knock Mexico down a peg in a NAFTA do-over, there is one problem our neighbor does not have: beating every single equity market in the Americas to a pulp.

For investors, Mexico is great…again. After a slight lull in affection back in April, the market has rediscovered Mexico now for the past two months. The trend is seen continuing until the fourth quarter.

Mexico was already great at the end of last year on into January for bond investors. They bought local currency Mexican government bonds when the peso fell to its lowest level on record, around 22 to the dollar. It’s now 17.17 to the dollar.  Those investors have gained at least 14.8% since January on the currency alone. The second-place currency in terms of strength against the dollar this year is the Brazilian real and that’s only gained 3.5%.

Morgan Stanley says the Mexico bull run is not over.

Economist Luis Arcentales of Morgan Stanley in New York says the mood has markedly changed since Trump first won the White House. “Besides the great food and the awful traffic, I did sense a shift among local investors who seemed much more constructive about Mexico after having been quite cautious because of a whole host of factors ranging from domestic politics to concerns about protectionism,” he says.

Last week’s news on upcoming NAFTA revisions helped strengthen Mexican markets seven more.  Many of the elements added, such as beefing up local content rules for manufacturers, protecting intellectual property rights and labor provisions were included in President Obama’s failed Trans-Pacific Partnership negotiations, and both Mexico and Canada agreed to make those concessions out of concern that the U.S. would bail and turn to Asia instead. NAFTA renegotiations begin on Aug. 16.

For Arcentales, barring the proposal to scrap the Chapter 19 rule in NAFTA on anti-dumping and trade duty matters in favor of the U.S., most Mexico watchers today think NAFTA just gets better, not worse.

Mexico has benefited from better coordination between the federal government’s two most important entities: oil firm Pemex and the central bank of Mexico, Banxico. Fiscal and monetary policies are tighter, energy reform that allows for greater foreign participation (meaning less spending for Pemex) has been a success thus far, and the central bank managed to protect the currency well, with ample reserves in a severe downturn.

Morgan Stanley strategists say they see “a window of opportunity to express a bullish view” on Mexico at least until their presidential elections next summer. Morgan analysts expect volatility to pick up in the first quarter.

“The story for the Mexican peso will be different in 2018,” says Andres Jaime, a strategist at Morgan.

The peso is unlikely to move closer to the dollar than 17 pesos. It’s already up from 18.12 when FORBES ran its portfolio manager profile on BlackRock’s Gerardo Rodriguez in June. Next year, political uncertainty will have a bigger influence on the currency and on Mexico in general, with volatility kicking into high gear by March. “Some cheapness in the currency is a near certainty in my view, particularly in the second quarter of 2018,” Jaime says.

For now, Mexico is still in the sweet spot. There’s potential for more upside.

Mexico seems to be in the midst of a period of relative calm. Investors have decided to shelve politics for now, possibly until NAFTA negotiations are well under way. Or in early 2018, when party alliances and candidates are defined. The economy is facing a full employment scenario similar to that of the United States. The official unemployment rate as of June is just 3.3%, down from 3.5% for much of the year. The net labor force participation rate rose to 59.3% from 59.2% in May.

Industrial production remains tepid, but that is because the statistical element is heavily weighted towards Mexico’s energy sector and construction.

Mexico continues to face downside risks from public spending cuts, higher gasoline prices and slightly higher interest rates, but it has since avoided the most adverse scenarios trumped up by the media, with the help of the president himself.

To date, there has been no mass deportations of Mexico’s illegal U.S. residents. Such a move would have put undue strain on Mexican public services. Many Mexicans in the United States, included undocumented workers, send money to their families in poor cities and towns across the country. That’s less money the Mexican government has to spend on social welfare, having counted on money from Mexican-Americans now for generations.

NAFTA meanwhile is still firing on all four cylinders, wiping out fears that Trump would sign an executive order calling for the immediate withdrawal from the trade treaty signed in 1995 under President Bill Clinton. They’ve dodged two bullets, helping, for investors anyway, to make Mexico great again.

“Mexico’s better than expected economic performance adds to 2017’s resurgence of emerging markets which is lifting global GDP growth back to potential,” says PNC Financial’s senior international economist Bill Adams in Pittsburgh. “The global economy has reached the sweet spot of the economic expansion,” he says, and within Latin America at least, Mexico is smack dab in the middle of that sweet spot.

 

Source: https://www.forbes.com/sites/kenrapoza/2017/07/24/for-wall-street-mexico-is-great-again/#125eaba576cd

 

Mexico welcomes U.S. NAFTA objectives, eyes stronger North America

By Anthony Esposito

MEXICO CITY (Reuters) – Mexico’s government on Monday said it would work to strengthen the North American economy after the United States published its objectives for the renegotiation of the NAFTA trade deal, which one Mexican official described as “not as bad” as feared.

In a statement, the Mexican economy ministry said it expected talks between the United States, Mexico and Canada on renegotiating the North American Free Trade Agreement (NAFTA) to be able to get under way from Aug. 16.

For now, Mexico would continue with domestic consultations on the revamp of the accord until early August, it added.

The ministry said it would work “to achieve a constructive negotiation process that will allow trade and investment flows to increase and consolidates cooperation and economic integration to strengthen North American competitiveness.”

The United States said its top priority for the talks was shrinking the U.S. trade deficit with Mexico and Canada, a recurring complaint of U.S. President Donald Trump. [L1N1K8149]

In a highly anticipated document sent to lawmakers, U.S. Trade Representative Robert Lighthizer said he would seek to reduce the trade imbalance by improving access for U.S. goods exported to Canada and Mexico under the three-nation pact.

Speaking under condition of anonymity, a senior Mexican official said the list of priorities was “not as bad as I was expecting” and welcomed that the United States was not pushing to impose punitive tariffs, as Trump has threatened.

The official also noted the U.S. wish to ditch the Chapter 19 dispute settlement mechanism that has hindered the United States from pursuing anti-dumping and anti-subsidy cases against Mexican and Canadian firms would be resisted firmly by Canada.

“Canada will fight to (the) death on Chapter 19,” the official said.

 

Source: https://www.reuters.com/article/us-usa-trade-nafta-mexico-idUSKBN1A301D

 

NAFTA Demise Fears Fade as U.S. Firms Committed to Mexico: Lobby

By Dave Graham and Ana Isabel Martinez

MEXICO CITY (Reuters) – Companies no longer fear the North American Trade Agreement (NAFTA) will collapse and top U.S. multinationals in Mexico are committed to investing in the country going forward, the head of a global business lobby said on Wednesday.

Frederic Garcia, President of Mexico’s Executive Council of Global Companies (CEEG), said preparations to renegotiate NAFTA and growing awareness of the accord’s economic benefits had all but put an end to fears that the deal would be scrapped.

“There was a moment where the probability, or the perception that NAFTA would end, was very strong,” Garcia said in an interview in Mexico City. “But today I think there’s an awareness that it will continue. The big worry that the deal could come to an end is an issue that’s behind us.”

The CEEG represents a host of multinationals in Mexico including AT&T Inc , Coca-Cola Co , General Motors Co , Microsoft Corp , Exxon Mobil Corp , Nestle, HSBC, Siemens and IBM Corp , which it says account for around 40 percent of total foreign direct investment.

It and other business associations have been active in extolling the benefits of NAFTA to Americans to counter threats by U.S. President Donald Trump to dump the 23 year-old accord that binds the United States, Mexico and Canada.

Mexico’s Economy Minister Ildefonso Guajardo said on Tuesday he expected the U.S. government to notify Congress early next week of plans to rework the accord, yielding talks by late August.

It was not yet clear how NAFTA would be revamped, but if Mexico’s efforts to update its free trade deal with the European Union proved instructive, it could include provisions to boost corporate compliance and adherence to the law, Garcia said.

Trump said last month he was ready to renegotiate NAFTA with Mexico and Canada, though since taking the presidency in January he also has maintained that the United States could withdraw from the agreement if talks did not work in favor of his homeland.

Arguing the accord has destroyed U.S. jobs, Trump has menaced multinationals manufacturing in Mexico with punitive tariffs, and his threats to quit NAFTA. This sent the peso to a record low in January.

Earlier that month Ford abruptly canceled a $1.6 billion plant in central Mexico following verbal attacks by Trump. But as the rhetoric from the White House began to moderate, the peso has recovered somewhat, and fears for NAFTA’s future have eased.

Last week, a Mexican business lobby said it expected investment to drop slightly this year due to uncertainty over Trump, but Garcia said the CEEG would make no forecasts over projected outlays to avoid drawing attention to the matter.

“As far as the U.S. firms in the CEEG go, from the first day of the new U.S. administration they’ve stated their great interest to continue operating in Mexico (and) their great interest to continue investing in Mexico,” he said.

However, they had done so in such a way as to preserve their interests with the U.S. administration, Garcia added.

 

Source: http://money.usnews.com/investing/news/articles/2017-05-17/nafta-demise-fears-fade-as-us-firms-committed-to-mexico-lobby