‘The most attractive emerging market’
It is not just stocks and the currency of Mexico that is attracting investor interest of late. The graph below shows Mexican bonds have been in demand as well as verified by the declining yields on the benchmark 10-year bond.
In order to assess the attractiveness of various emerging markets, Bloomberg recently analyzed nine of the ten countries which are a part of JPMorgan Chase & Co.’s Emerging Market Currency Index. Singapore was left out as it considers the country to be developed.
Based to metrics like growth, yields and equity valuations, their analysis showed Mexico was “the most attractive emerging market for investors.”
What can you expect from Mexican assets going forward?
Mexico is looking for consumption-oriented growth in the face of a possible challenge to its exports to the US. However, due to elevated inflation, high consumption could be a problem. According to Mexico’s statistical agency INEGI, the country’s headline inflation for the 12-months until mid-March rose by 5.29% – the highest since the second half of February 2009.
The high level of inflation is expected to make the central bank increase its key interest rate. Central bank chief Agustin Carstens has tried to convey that the institution will attempt to keep inflation expectations anchored. He has said that inflation would remain above the 4% target for 2017 but will decline towards its 3% target for next year.
A reduction in inflation expectations would be instrumental in keeping Mexican bonds attractive. The recent purchases have been on assertions that these bonds have been oversold. But if inflation continues to rise unabated, then the resultant rate increases, coupled with higher price rise expectations, would lead to the country’s bonds becoming unpopular.
One development that can help check inflation expectations is the rise of the Mexican peso. This is possibly one asset class where a bull run may still have legs. The dollar continues to weaken, which will benefit the peso. A higher unit puts downward pressure on price rises.
As far as Mexican equities are concerned, a high rate of inflation, which leads to a rate hike, can be detrimental to stocks. But apart from that, investors should keep an eye on valuations. As of March 22, the price-to-earnings ratio of the iShares MSCI Mexico Capped ETF (EWW) stands at 20.41, much higher than 13.99 for the iShares MSCI Brazil Capped ETF (EWZ).
Barron’s reported that research firm Strategy-Pavilion Global is seeing “more downside risks” for Mexican assets – stocks, bonds and the currency – and it “would wait until the third quarter before re-entering Mexican assets.”