TAKING POLE POSITION.

Luis Negrete, Equity Director at Accival puts forward the case for Mexico becoming Latin America’s predominant market for the next decade.

From a global and macroeconomic point of view, for Mexico to become the leading Latin American market, a number of different factors need to come into play, and I believe that alignment is happening now. These comprise both the global and regional economic factors, the domestic economy and developments in Mexico’s investment markets.

Global and regional factors

Over the last few decades China’s high growth rates were fuelled by a considerable increase in the consumption of raw materials, which benefited the producers such as Brazil. However, there are signs that this trend is changing. On one hand we have a slowdown in China’s growth rates and in addition, as China’s middle class grows, the country is starting to become an important consumer of manufactured products, which directly benefits economies like Mexico’s where 80% of exports are manufactured products.

In addition, the financial crisis in Europe has translated into slower growth, and even recession, in much of that region, while the lack of clarity regarding a solution to the issue of the fiscal cliff in the United States, have caused the flows of global capital to look for investment alternatives in countries with stable economies and growth prospects.

Furthermore, Brazil which over the last 12 years has been a focus of attention in Latin America for international investors, is starting to show signs of fatigue and over-regulation. This in turn is causing global markets to consider alternatives in the region which have the size, stability and market depth to be able to capture these flows.

The macro-economy

This leads us to Mexico. The fiscal discipline that has been followed during the last three presidential periods (totalling 18 years), the sustained growth, the independence of Banco de Mexico, social stability, and especially the prospect of far-reaching structural reforms make Mexico an appealing option. This has been evidenced by the strong interest in Mexico shown by several Asian sovereign funds in the latter months of 2012. This is something that has not been seen since the 1990s.

Currency markets

There have been a number of important developments in Mexico’s financial markets in the last few years, key among them being the exchange rate. The Mexican Peso has become one of the more liquid currencies in the world, and without a doubt the most heavily traded within those of the emerging countries, to the degree that its value now depends more on the international perception of risk than on the state of the Mexican economy.

Debt markets

In the case of debt instruments, Mexico has also had a developed strongly in the last few years. In government debt there are issues that reach one hundred years, providing a very complete curve to international investors, which in addition is usually very liquid in the majority of its notes. The levels of interest shown by international institutional clients in the instruments issued by the Federal Government have grown significantly over the period and they are now important holders of Mexican debt instruments. The market has also had very strong growth in the issuance of corporate debt, where in many cases, issues of corporate notes have rates that are very close to the government debt.

Equity markets

Let’s not forget the equity market, which has also shown important advances. First are the regulatory issues, which thanks to the co-operation between the Mexican Stock Exchange (BMV) and the brokerage houses that operate locally, have been updated to the level of international standards in regard to issues of corporate governance for quoted companies as well as in their operational practices. Second, thanks to comprehensive investment in technology by the Mexican Stock Exchange and brokers, we now have a market in which algo trading, Direct Market Access (DMA) and the High Frequency Trading (HFT) are common tools and operating models in the Mexican market. These can be offered by several intermediaries to their international and domestic clients.

Another crucial element in the development of the Mexican market is the SIC (International Quotation System) that allows investors operating in Mexico to buy and sell company’s titles and ETFs that are quoted on international markets. The growth of this market is such that they already quote close to 400 names. It is also worth mentioning that for the local institutional investors (Mutual Funds and Afores), the SIC has been an excellent tool enabling them to diversify their portfolios internationally.

Finally, together with the three markets mentioned (FX, Debt and Equity) there is the possibility to trade derivatives on any of the underlying instruments mentioned either in the OTC market or through an organized market which is the Mexder, in which futures and options on exchange rates, interest rates, stock indexes and individual stocks are quoted.

Conclusion

Mexico’s markets are ready to receive the capital flows that are looking to leverage the growth and the stability of its economy in the coming years. The investment options in Mexico range from short-term debt instruments issued by the Federal Government, to structured products with levels of sophistication that match those of any developed market in the world. In most cases the financial intermediaries that operate locally have in addition the advantage of being affiliates of international groups, giving them an important strength as well as local know-how, together with the global scope the international client can find in the world’s main financial markets.