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Growth Outlook Downgrade In Mexico Hits Market But No Big Deal

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Mexico Gets Tough On Trade

Mexico has just launched a probe into trade practices relating to steel and textiles. Officials within the new government want to impose tariffs on steel and textile imports in order to protect local industries from dumping and discount-priced imports. The proposed tariffs won’t affect free-trade nations like the U.S. and Canada but there’s one problem. The USMCA, the renegotiated NAFTA, has not yet been ratified in the U.S.so there is some concern.

Deputy Economy Minister Ernesto Acevedo says the government is planning tariffs of 15% on steel and 25% to 30% on tariffs. The U.S. tariffs on Mexican and Canadian steel are still in place while the President waits on Congress to ratify the deal.

The U.S. Agriculture Secretary Sonny Perdue spoke before Congressional committee earlier this week. He says quota-based limits are more appropriate in this time of transition. Quota-based limitations on trade would allow a certain amount of steel to come into the U.S. tariff-free while any above that amount would face levies.  

The Central Bank Of Mexico says the delay in enforcing the USMCA is hurting the Mexican economy. In their latest update, the bank has lowered its GDP forecast for this year and next. The bank now sees Mexican GDP growth in the range of 1.1% to 2.1% in 2019 and 1.7% to 2.7% in 2020. These estimates are down 0.6% and 0.3% from the previous and more in line with estimates from the World Bank, IMF, and other major economic forecasters.

The bank flagged a number of risks including the possibility sovereign debt could be downgraded. Inflationary pressures remain hot but continue to trend lower and are expected to hit the 3.0% target in 2020. In that vein, rate cuts are expected from the bank despite their decision to stand pat at the last meeting. The bank’s current rate is near 8.25%.

What investors need to take from these developments is this. Mexico is expected to grow over the next 2 to 10 years. It is one of the leading emerging markets in Latin America and globally with GDP projected to expand over the next few years. Reforms begun by President Nieto are being built upon by new President Obrador and will cement Mexico as a manufacturing and export/import nation. Fuel shortages, road blockades, strikes, and delays to the USMCA may curb growth but the long-term outlook is very bullish.

The Mexico Fund (MXF), a benchmark for investment in Mexico, continues to focus on the consumer, financials, and industrial/infrastructure. The top five holdings are unchanged other than a shake-up in the order. America Movil, the largest telecommunications company in Latin America, remains the number one portfolio company at 13.5%. Ternium, Mexico’s largest steel producer, is a relatively new addition to the top ten and sitting at just over 4.0%.

New in the top-ten is Gmexico Transportes with an allocation of 3.0%. Gmexico Transportes is a railroad company operating as a cargo hauler and passenger service. Most of these stocks can be bought on the U.S. stock exchange in the form of ADR but some, like Gmexico Transportes, is not. You can pick and choose individual stocks or buy a basket of the top, curated Mexican stocks with the Mexico Fund.

The Mexico Fund is a closed-end fund trading on the NYSE. It offers all the protection of a U.S. listed stock but provided full, focused exposure to Mexico’s “bluechip” stocks. The fund pays an annual dividend according to a managed distribution plan that yielded close to 5.5% at today’s share prices.