Top of main content
Red shorts desert

Market Update - Mexico in Transition

Market update
Investments
Mexico
Wealth
Education
International

Market Update - Mexico in Transition

Sep 14, 2022

  • Mexico, like many other economies, is navigating a shifting landscape of short-term global economic and financial fundamentals, while also developing longer-term opportunities
  • In the short term, the Mexican economy must deal with rampant inflation and a central bank that is committed to fighting that inflation by raising policy rates aggressively
  • Latin American equities benefited from the run up in commodity prices, but like other emerging markets have been hit hard by the volatility and uncertainty in emerging market equities this year
  • We have upgraded our view of Mexican equities as the combination of attractive valuations and solid but unspectacular growth prospects should be of interest to global investors
  • We continue to recommend that equity investors maintain a balance between growth and value and that they look to deploy total return strategies. This should boost returns through dividend yield and buyback strategies
  • Given the weakness in Asian emerging markets, we believe the attractive valuations provided in Latin America, and in particular in Mexico, are compelling


Mexico, like many other economies, is navigating a shifting landscape of short-term global economic and financial fundamentals, while also developing longer-term opportunities. In the short term, the Mexican economy must deal with rampant inflation and a central bank that is committed to fighting that inflation by raising policy rates aggressively. Longer term, opportunities exist in numerous areas ranging from energy, food production, and manufacturing. Moreover, Mexico does not suffer from the high levels of political uncertainty that other countries in the region are likely to struggle with over the coming months.

At HSBC Private Bank, we have decided to overweight Mexican equities for several reasons. First, equities in Latin America are trading at historic discounts relative to their emerging market peers. Second, the central bank, Banxico, has tightened policy more aggressively than the US Federal Reserve in order to help combat rising inflationary pressures. The trajectory of policy rates has helped to keep the Mexican Peso steadier than most other EM currencies, which should aid in its fight against inflation. The central bank's actions to fight inflation may prove beneficial as we head towards 2023. Third, the Mexican economy has historically been more directly linked to US economic performance. This should prove beneficial for Mexico as it seems the US economic slowdown should not be as pervasive as in other global regions, providing Mexico with an advantage, especially relative to its peers in the region that are more tied to China. Finally, the nearshoring movement, which has gained momentum with the Biden administration, should provide further upside to the Mexican economy and equity markets across multiple sectors in the not too distant future.
 

Mexican equities: a relative game

Mexican equities have suffered from volatility like other global markets. In Latin America, equity markets continue to trade at more than 25 per cent discounts relative to their historic averages. While that is true in Mexico, other markets like Brazil and Chile are trading at much greater discounts relative to their historical averages. Moreover, economists forecast that other countries in the region could see a peak in inflation and policy rates faster than Mexico.

On the other hand, Mexican equities have drivers that could provide more consistent returns relative to regional peers. First, some of the other equity markets in the region have tied their fortunes more directly to China. Forecasts for growth in China for the next 18 months are modest at best and well below the targets set forth by the government. Second, the Mexican economy and central bank are more linked to the US economy and markets. While economic growth in the US was officially negative in the first half of the year, forecasts for the balance of this year and 2023 look relatively benign. Significantly, underlying demand and strength of the labor market remain visible. Most economists suggest growth in the US will remain around trend but the economy should avoid outright recession. Solid wage gains and a historically low unemployment rate should enable consumers to maintain steady consumption, albeit at a slower pace and discounted prices. Third, the Mexican central bank has raised rates aggressively and along a similar trajectory as the US Federal Reserve. This has maintained stability for the currency. While the US Fed is not done raising rates, it seems that much of the heavy lifting is behind it and future Fed tightening policy could be less hawkish. This could provide solace to markets and maintain somewhat of a cap on longer-term interest rates, which could be positive for equities. Finally, other countries in the region are in the midst of political turmoil, elections, and constitutional reform. While Mexico is not a political oasis of stability, on a relative basis, localized risks seem more manageable and familiar.

Monetary growth has been more stable in Mexico

M2: Y-o-Y % change

Source: Bloomberg, HSBC Global Private Banking as at 25 August 2022.

Opportunities & proximity

Mexico is a participant in several sectors where supply remains constrained, demand is fairly inelastic, and pricing power and margins can be maintained. Two of those sectors are food and energy. In addition, Mexico is a major manufacturing partner to the US, and bilateral trade agreements such as USMCA, will continue to provide Mexico with advantages. In the financial sector, the normalization of interest rates should enable companies in the sector maintain margins and potentially expand profitability.

In the agricultural sector, Mexico's Ministry of Agriculture & Rural Development noted that in the first half of 2022, Mexican agricultural trade with the US increased by 16 per cent compared to the same period last year. Exports to the US rose 18 per cent while imports from the US increased 13 per cent during the period. Mexican food trade with the US resulted in a USD10.1 billion surplus balance which jumped 24 per cent from the first half of the year in 2021. The agricultural sector remains well positioned and with global supply constraints remaining, should remain quite profitable as well.

The Covid pandemic and recession resulted in tremendous pent­ up demand and supply chain disruptions. As a result, many American corporations have decided to begin the process of nearshoring. Moving production closer to end-users could make sense for some sectors and companies, as it eliminates long shipping routes that may be sensitive to global disruptions. Other considerations are actually proving more structural, such as geopolitical risk, higher shipping costs, and the issues surrounding immigration and local Job creation. This would move supply chain logistics to the domestic market or to partners who are closer in proximity. Mexico would clearly stand to benefit greatly from this trend, especially given its advantages in terms of lower labor and transportation costs, and its proximity to the US market. In the short term, industrial conglomerates and auto parts producers would likely benefit most directly. In addition, industrial warehouses and logistical distribution companies with a presence in border states could feel a more immediate impact. In the medium to longer term, we expect this effort to expand meaningfully, with Mexico as a key potential beneficiary.

Over time we would expect companies in sectors as varied as technology, vehicle production & parts, basic manufacturing, medical equipment, and household appliances to expand efforts to relocate manufacturing facilities to a more productive, profitable, and proximate base like Mexico. Globally, manufacturing exports remain quite strong, especially to large end user markets like the US, Europe, and China. The US remains the largest importer of manufactured goods, as it alone was responsible for 15 per cent of total global manufacturing imports from 2018-2020, with around 25 per cent of this sourced from China and around 15 per cent from Mexico.
 

Both central banks have been tightening aggressively

Central Bank Policy Rates

Source: Bloomberg, HSBC Global Private Banking as at 25 August 2022.

Banxico, inflation & the currency

The central bank of Mexico, Banxico, has kept to its policy of tightening monetary policy in a synchronized manner with the US Fed. Banxico remains committed to fighting inflation. It has raised policy rates consistently from a trough of 4.0 per cent in February 2021. In August, it hiked its policy rate by 75 basis points to 8.50 per cent in a unanimous decision. This was in line with market consensus forecasts and the US Fed. Significantly, with its latest hike, the Mexican central bank has raised its policy rates 450 basis points from the most recent trough, which is more aggressive than the US Fed's tightening policy of 250 basis points. This tightening policy signals a serious desire to fight inflation and defend the currency. The Mexican Peso has been the best performing currency in the region, especially against the US dollar. This has not been easy as the US dollar typically rises and has risen during turbulent economic times.

Looking ahead to 2023, HSBC believes there is room for the currency to strengthen. Some of the issues surrounding higher inflation, slower growth, a slower moving US Fed, and a solid balance of payments picture suggest the MXN could be a standout currency in emerging markets and the region.

As in many other countries, inflation has been on the rise in Mexico in the post-Covid economic recovery. Mexican inflation has risen rapidly, troughing at 2.2 per cent in the spring of 2020, but posting an 8.0 per cent year-on-year growth rate in June 2022. This is the fastest rise in inflation since 2001. Given domestic and global forces, headline and core inflation expectations continue to show that the convergence to the 3 per cent target will most probably be delayed until 2024.

In the US, the NY Fed posted a study "How much did supply constraints boost US inflation?". The Fed's analysis was that 60 per cent of the Jump in US inflation during the 2019-2021 period was due to pent-up demand and the overall stronger demand for goods. The remaining 40 per cent was due to supply-side issues and logistical constraints, that ended up magnifying the impact of the higher demand. The Fed report concluded that US inflation would have peaked at 6 per cent instead of 9 per cent without the supply bottlenecks. Clearly, that type of analysis can be applied in other countries. Therefore, slowing global demand should reduce supply constraints and tighter monetary policy in the form of higher policy rates and slower growth in monetary aggregates, should help tame demand. That confluence should help contain inflation in the next few years.
 

Inflation has accelerated in both the US & Mexico. Slower growth may help slow demand and supply disruptions

CPI: Y-o-Y % change

Source: Bloomberg, HSBC Global Private Banking as at 25 August 2022.

Investment Summary

Globally, the asynchronous business cycle continues. In countries like the US and Mexico where the central bank is fighting inflation by aggressively raising policy rates, equity markets have remained particularly volatile. Given the hawkish policies already enacted, future tightening will likely be less aggressive. Moreover, in both countries inflation may be peaking, and interest rates in those markets may provide some solace to equity investors.

Regionally, Latin American equities benefited from the run up in commodity prices, but like other emerging markets have been hit hard by the volatility and uncertainty in emerging market equities this year. We have upgraded our view of Mexican equities as the combination of attractive valuations and solid but unspectacular growth prospects should be of interest to global investors. This is especially true given prospects for growth and profitability in other global markets.

We continue to recommend that equity investors maintain a balance between growth and value and that they look to deploy total return strategies. This should boost returns through dividend yield and buyback strategies. Given the weakness in Asian emerging markets, we believe the attractive valuations provided in Latin America, and in particular in Mexico, are compelling. While Mexico's discounted valuations are not as deep as some of its regional peers we feel the stability of growth and earnings, given its relationship with US economy and markets, is a positive. In addition, relative political stability and the potential for expanding its manufacturing base through an expansion of nearshoring and manufacturing exports to the US provides Mexican exports and equity markets with further upside potential.

The following may be subject to local requirements.

 

This is a marketing communication issued by HSBC Private Banking. This document does not constitute independent investment research under the European Markets in Financial Instruments Directive (‘MiFID’), or other relevant law or regulation, and is not subject to any prohibition on dealing ahead of its distribution. HSBC Private Banking is the principal private banking business of the HSBC Group. Private Banking may be carried out internationally by different HSBC legal entities according to local regulatory requirements. Different companies within HSBC Private Banking or the HSBC Group may provide the services listed in this document. Some services are not available in certain locations. Members of the HSBC Group may trade in products mentioned in this publication.

 

This document is provided to you for your information purposes only and should not be relied upon as investment advice. The information contained within this document is intended for general circulation to HSBC Private Banking clients and it has not been prepared in light of your personal circumstances (including your specific investment objectives, financial situation or particular needs) and does not constitute a personal recommendation, nor should it be relied upon as a substitute for the exercise of independent judgement. This document does not constitute and should not be construed as legal, tax or investment advice or a solicitation and/or recommendation of any kind from the Bank to you, nor as an offer or invitation from the Bank to you to subscribe to, purchase, redeem or sell any financial instruments, or to enter into any transaction with respect to such instruments. The content of this document may not be suitable for your financial situation, investment experience and investment objectives, and the Bank does not make any representation with respect to the suitability or appropriateness to you of any financial instrument or investment strategy presented in this document.

 

If you have concerns about any investment or are uncertain about the suitability of an investment decision, you should contact your Relationship Manager or seek such financial, legal or tax advice from your professional advisers as appropriate.

 

Market data in this document is sourced from Bloomberg unless otherwise stated. While this information has been prepared in good faith including information from sources believed to be reliable, no representation or warranty, expressed or implied, is or will be made by HSBC Private Banking or any part of the HSBC Group or by any of their respective officers, employees or agents as to or in relation to the accuracy or completeness of this document.

 

It is important to note that the capital value of, and income from, any investment may go down as well as up and you may not get back the original amount invested. Past performance is not a guide to future performance. Forward-looking statements, views and opinions expressed and estimates given constitute HSBC Private Banking’s best judgement at the time of publication, are solely expressed as general commentary and do not constitute investment advice or a guarantee of returns and do not necessarily reflect the views and opinions of other market participants and are subject to change without notice. Actual results may differ materially from the forecasts/estimates.  When an investment is denominated in a currency other than your local or reporting currency, changes in exchange rates may have an adverse effect on the value of that investment. There is no guarantee of positive trading performance.

 

Foreign securities carry particular risks, such as exposure to currency fluctuations, less developed or less efficient trading markets, political instability, a lack of company information, differing auditing and legal standards, volatility and, potentially, less liquidity.

 

Investment in emerging markets may involve certain additional risks, which may not be typically associated with investing in more established economies and/or securities markets. Such risks include (a) the risk of nationalization or expropriation of assets; (b) economic and political uncertainty; (c) less liquidity in so far of securities markets; (d) fluctuations in currency exchange rate; (e) higher rates of inflation; (f) less oversight by a regulator of local securities market; (g) longer settlement periods in so far as securities transactions and (h) less stringent laws in so far the duties of company officers and protection of Investors.

 

You should contact your Relationship Manager if you wish to enter into a transaction for an investment product. You should not make any investment decision based solely on the content of any document.

 

Some HSBC Offices listed may act only as representatives of HSBC Private Banking, and are therefore not permitted to sell products and services, or offer advice to customers. They serve as points of contact only. Further details are available on request.

 

In the United Kingdom, this document has been approved for distribution by HSBC UK Bank plc whose Private Banking office is located at 8 Cork Street, London W1S 3LJ and whose registered office is at 1 Centenary Square, Birmingham, B1 1HQ. HSBC UK Bank plc is registered in England under number 09928412.  Clients should be aware that the rules and regulations made under the Financial Services and Markets Act 2000 for the protection of investors, including the protection of the Financial Services Compensation Scheme, do not apply to investment business undertaken with the non-UK offices of the HSBC Group. This publication is a Financial Promotion for the purposes of Section 21 of the Financial Services & Markets Act 2000 and has been approved for distribution in the United Kingdom in accordance with the Financial Promotion Rules by HSBC UK Bank plc, which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

 

In Guernsey, this material is distributed by HSBC Private Banking (C.I.) a division of HSBC Bank plc, Guernsey Branch which is licensed by the Guernsey Financial Services Commission for Banking, Insurance Intermediary and Investment Business. In Jersey, this material is issued by HSBC Private Banking (Jersey) which is a division of HSBC Bank plc, Jersey Branch: HSBC House, Esplanade, St. Helier, Jersey, JE1 1HS. HSBC Bank plc, Jersey Branch is regulated by the Jersey Financial Services Commission for Banking, General Insurance Mediation, Fund Services and Investment Business. HSBC Bank plc is registered in England and Wales, number 14259. Registered office 8 Canada Square, London, E14 5HQ. HSBC Bank plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

 

In France, this material is distributed by HSBC Europe Continental. HSBC Private Banking is the private banking department of the HSBC Group in France. HSBC Europe Continental is subject to approval and control by the Autorité de Contrôle Prudentiel et de Résolution [Prudential Control and Resolution Authority] as a credit entity. HSBC Private Banking department of HSBC Continental Europe, Public Limited Company with share capital of 491,155,980.00 €- SIREN 775 670 284 Trade and Companies Register of Paris Bank and Insurance Intermediary registered with the Organisme pour le Registre des Intermédiaires en Assurances [Organisation for the Register of Insurance Intermediaries] under no. 07 005 894 (www.orias.fr) - Intra-community VAT number: FR 707 756 702 84. HSBC Private Banking - HSBC Europe Continental – Registered office: 38, avenue Kléber 75116 Paris- FRANCE- Tel. +33 (0) 1 49 52 20 00.

  

In Switzerland, this material is distributed by HSBC Private Bank (Suisse) SA, a bank regulated by the Swiss Financial Market Supervisory Authority FINMA, whose office is located at Quai des Bergues 9-17, 1201 Genève, Switzerland. This document does not constitute independent financial research, and has not been prepared in accordance with the Swiss Bankers Association’s “Directive on the Independence of Financial Research”, or any other relevant body of law.

 

In Abu Dhabi Global Markets (ADGM) by HSBC Bank Middle East Limited, ADGM Branch, 3526, Al Maqam Tower, ADGM, Abu Dhabi, is regulated by the ADGM Financial Services Regulatory Authority (FSRA). Content in this material is directed at Professional Clients only as defined by the FSRA and should not be acted upon by any other person.

 

In Dubai International Financial Center (DIFC) by HSBC Private Bank (Suisse) S.A., DIFC Branch, P.O. Box 506553 Dubai, United Arab Emirates, which is regulated by the Dubai Financial Services Authority (DFSA) and is permitted to only deal with  Professional Clients as defined by the DFSA.

 

In South Africa, this material is distributed by HSBC Private Bank (Suisse) SA’s Representative Office approved by the South African Reserve Board (SARB) under registration no. 00252 and authorized as a financial services provider (FSP) for the provision of Advice and Intermediary Services by the Financial Sector Conduct Authority of South Africa (FSCA) under registration no. 49434. The Representative Office has its registered address at 2 Exchange Square, 85 Maude Street, Sandown, Sandton.

 

In Bahrain and Qatar, this material is distributed by the respective branches of HSBC Bank Middle East Limited, which is locally regulated by the respective local country Central Banks and lead regulated by the Dubai Financial Services Authority.

 

In Lebanon, this material is handed out by HSBC Financial Services (Lebanon) S.A.L. (“HFLB”), licensed by the Capital Markets Authority as a financial intermediation company Sub N°12/8/18 to carry out Advising and Arranging activities, having its registered address at Centre Ville 1341 Building, 4th floor, Patriarche Howayek Street, Beirut, Lebanon, P.O.Box Riad El Solh 9597.

 

In Hong Kong and Singapore, THE CONTENTS OF THIS DOCUMENT HAVE NOT BEEN REVIEWED OR ENDORSED BY ANY REGULATORY AUTHORITY IN HONG KONG OR SINGAPORE. HSBC Private Banking is a division of Hongkong and Shanghai Banking Corporation Limited. In Hong Kong, this document has been distributed by The Hongkong and Shanghai Banking Corporation Limited in the conduct of its Hong Kong regulated business. In Singapore, the document is distributed by the Singapore Branch of The Hongkong and Shanghai Banking Corporation Limited. Both Hongkong and Shanghai Banking Corporation Limited and Singapore Branch of Hongkong and Shanghai Banking Corporation Limited are part of the HSBC Group. This document is not intended for and must not be distributed to retail investors in Hong Kong and Singapore. The recipient(s) should qualify as professional investor(s) as defined under the Securities and Futures Ordinance in Hong Kong or accredited investor(s) or institutional investor(s) or other relevant person(s) as defined under the Securities and Futures Act in Singapore. Please contact a representative of The Hong Kong and Shanghai Banking Corporation Limited or the Singapore Branch of The Hong Kong and Shanghai Banking Corporation Limited respectively in respect of any matters arising from, or in connection with this report.

 

Some of the products are only available to professional investors as defined under the Securities and Futures Ordinance in Hong Kong / accredited investor(s), institutional investor(s) or other relevant person(s) as defined under the Securities and Futures Act in Singapore. Please contact your Relationship Manager for more details.

 

The specific investment objectives, personal situation and particular needs of any specific persons were not taken into consideration in the writing of this document. To the extent we are required to conduct a suitability assessment in Hong Kong where this is permitted by cross border rules depending on your place of domicile or incorporation, we will take reasonable steps to ensure the suitability of the solicitation and/or recommendation. In all other cases, you are responsible for assessing and satisfying yourself that any investment or other dealing to be entered into is in your best interest and is suitable for you.

 

In all cases, we recommend that you make investment decisions only after having carefully reviewed the relevant investment product and offering documentation, HSBC’s Standard Terms and Conditions, the “Risk Disclosure Statement” detailed in the Account Opening Booklet, and all notices, risk warnings and disclaimers contained in or accompanying such documents and having understood and accepted the nature, risks of and the terms and conditions governing the relevant transaction and any associated margin requirements. In addition to any suitability assessment made in Hong Kong by HSBC (if any), you should exercise your own judgment in deciding whether or not a particular product is appropriate for you, taking into account your own circumstances (including, without limitation, the possible tax consequences, legal requirements and any foreign exchange restrictions or exchange control requirements which you may encounter under the laws of the countries of your citizenship, residence or domicile and which may be relevant to the subscription, holding or disposal of any investment) and, where appropriate, you should consider taking professional advice including as to your legal, tax or accounting position. Please note that this information is neither intended to aid in decision making for legal or other consulting questions, nor should it be the basis of any such decision. If you require further information on any product or product class or the definition of Financial Products, please contact your Relationship Manager.

 

In Luxembourg, this material is distributed by HSBC Private Banking (Luxembourg) SA, which is located at 16, boulevard d’Avranches, L-1160 Luxembourg and is regulated by the Commission de Surveillance du Secteur Financier (“CSSF”).

 

In the United States, HSBC Private Banking offers banking products and services through HSBC Bank USA, N.A. – Member FDIC and provides securities and brokerage products and services through HSBC Securities (USA) Inc., member NYSE/ FINRA/SIPC, and an affiliate of HSBC Bank USA, N.A.

 

Investment products are: Not a deposit or other obligation of the bank or any affiliates; Not FDIC insured or insured by any federal government agency of the United States; Not guaranteed by the bank or any of its affiliates; and are subject to investment risk, including possible loss of principal invested.

 

Australia

If you are receiving this document in Australia, the products and services are provided by The Hongkong and Shanghai Banking Corporation Limited (ABN 65 117 925 970, AFSL 301737) for “wholesale” customers (as defined in the Corporations Act 2001). Any information provided is general in nature only and does not take into account your personal needs and objectives nor whether any investment is appropriate. The Hongkong and Shanghai Banking Corporation Limited is not a registered tax agent. It does not purport to, nor does it, give or provide any taxation advice or services whatsoever. You should not rely on the information provided in the documents for ascertaining your tax liabilities, obligations or entitlements and should consult with a registered tax agent to determine your personal tax obligations.

 

Where your location of residence differs from that of the HSBC entity where your account is held, please refer to the disclaimer at https://www.privatebanking.hsbc.com/disclaimer/cross-border-disclosure for disclosure of cross-border considerations regarding your location of residence.

 

No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of HSBC UK Bank plc.

 

A complete list of private banking entities is available on our website, https://www.privatebanking.hsbc.com.

 

©Copyright HSBC 2022

ALL RIGHTS RESERVED

Listening to what you have to say about services matters to us. It's easy to share your ideas, stay informed and join the conversation.