By Raymond Michaels – International Banker
The fears that caused a downturn in Mexican stocks are beginning to lift, revealing resilient and buoyant performance as the country’s main stock index, Mexbol, hits record highs. The run-up to the US presidential election stoked fears amongst international markets as the Republican candidate, Donald Trump, lambasted the current state of US-Mexico relations. The rhetoric primarily surrounded the US-Mexico terms of trade and the potential threat of new tariffs against Mexican imports. More pressing was the threat of a US-built border wall touted by candidate Trump to stem the northward flow of illegal migrants. The culmination of these fears fueled a selloff of Mexican pesos and severe underperformance of the currency against the US dollar.
As threats failed to materialize, investors have been emboldened by the performance of the Mexican peso—returning the country to profitability and positive performance. The rebounding peso led to a flurry of investment from international markets, counteracting the initial foreign-exchange flight in 2016. While uncertainty still surrounds Mexico’s upcoming presidential elections in 2018 and the imminent North American Free Trade Agreement (NAFTA) negotiations, the positive outlook seems to be trumping doubts. The markets, then, have been reasonably bullish in their assessments of Mexico’s future performance.
As noted, troubles in the Mexican stock market began during the 2016 US election. The size of the US’s and Mexico’s economies, coupled with their 3,000-kilometer shared border, results in a substantial trade relationship—roughly 80 percent of Mexican exports are bound for the United States. Moreover, the trade relation between the two countries is cemented in NAFTA: the trilateral agreement comprising the US, Mexico and Canada.
Mexico’s dependence on the US market explains the heightened anxiety surrounding then-candidate Trump’s threat to abolish NAFTA, install fierce tariffs on Mexican imports and build the infamous wall across the US-Mexico border. With a potential drop in the US-Mexican trade relation, the expected tightening of US monetary policy created additional unease that the peso would underperform in the wake of President Trump’s election. Fearing a steep downturn in Mexican growth, bearish investors fled Mexican markets: selling off the Mexican peso and dumping major Mexican stocks. As a result, the peso was the worst-performing currency against the US dollar in 2016. As President Trump took office, the peso and the Mexican economy continued to fall—with the Mexbol bottoming out at $43,998 in the wake of the election.
However, as the Trump Administration and Republican-controlled government proved unable to pass meaningful legislation, fears of Mexican underperformance began abating. The two factors that contributed to 2016’s substantial drop in Mexican shares—the renegotiation of NAFTA and tightening monetary policy from the US Federal Reserve System—seemed exaggerated as the Mexican economy continued surging forward. To prepare for the expected rise in US interest rates, the Mexican central bank, Banxico (Banco de México), implemented a forceful monetary policy to counteract the expected capital flight. An aggressive monetary policy and skillful trade negotiations were the basis for an economic growth that was as-yet unexpected. With the Trump Administration focused on domestic issues and Russian investigations, little progress has been made on the NAFTA negotiations, allowing trade to rebound under the weaker Mexican peso. This boon to Mexican growth (2.6 percent in the first quarter of 2017) has seen the peso recover and become the best-performing currency against the US dollar, boasting 15 percent growth in 2017. Analysts note that, while not the greatest growth, Mexico’s performance has been higher than the market initially predicted. Moreover, growth is expected to continue into 2018 as the Mexican government bolsters its position.
Market reactions to downturn
Markets have given Mexican performance in 2017 a warm welcome as the country’s stocks hit record levels. July 2017 saw the Mexbol peak at $51,772.37 share prices amid increased investor confidence. Rising for the third straight session, retail sales in May saw a 4.1-percent growth year-to-date. As a collection of Mexico’s largest companies submit their reports in the coming days, analysts expect positive results to accompany the improved performance.
This is not to say the Mexican stock index has not also had its negative results. Immediately after its 52-week high, the Mexbol slid for four straight sessions prior to seeing a return to growth. Individual companies have also returned encouraging results, such as Walmart de Mexico—the country’s largest retailer—which rose more than 3 percent after a slew of recent losses. A Mexican real-estate investment trust, Fibra Nova, expected that it would raise roughly 2.27 billion Mexican pesos in its initial public offering.
Ultimately, the peso’s improved performance is expected to strengthen as the US Fed continues its monetary tightening. The recent dip in the Mexbol coincided with the Fed’s recent announcement to leave interest rates unchanged for now. The announcement suggests that the Fed still has concerns about inflation and the current unemployment rate, requiring more stable information prior to continuing its tightening policy. While the Mexican economy is clearly sensitive to shifts in US domestic policy, the effects are more muted than previously thought.
At present, more uncertainty is attached to the upcoming Mexican presidential elections in 2018. Populist candidate, Andrés Manuel López Obrador, is garnering significant support and stands to be a major contender for the presidency. If Obrador comes into office, there exists the very real possibility that the US-Mexico trade relationship could suffer as much as previously thought. For now, investors and legislators seem to be handling the uncertainty with a deft touch as they navigate the pitfalls of the new international reality.