Mexican Markets On The Mend
After a rough 2009, Mexico’s economic fundamentals look set for a breather over the next couple of months, as exports, manufacturing and unemployment levels continue to benefit from unprecedented fiscal stimulus north of the border. If the US Federal Reserve opts to keep the monetary floodgates open for a while longer, this could translate into some pretty attractive relative value plays for Mexican financial market assets compared to other regional peers, a view which is shared by my colleagues at BMI.
Take the Mexican peso, for example. Since mid-January the rally in the US dollar has seen rapid sell-offs in both the Chilean peso and Brazilian real (although these losses have been pared back somewhat in recent trading). MXN, on the other hand, has largely shrugged off the recent dollar strength, and barring another round of global risk aversion could soon be resuming its moderate appreciatory trend.
Another asset class that has been moving in Mexico’s favour of late is the credit default swaps (CDS) market. The country’s benchmark 5-year CDS contract has already moved back inside that of Colombia, and with the latter unlikely to gain investment grade status anytime soon, I’m fairly optimistic that the spread between the two contracts will continue moving in Mexico’s favour over the months ahead.
Perhaps more significant is the narrowing of the spread of Brazil’s 5-year CDS contract over Mexico’s, which has the potential to turn negative if Brazilian fiscal profligacy continues in the run up to October’s elections. Again, this is not a vote of confidence in Mexico’s fiscal fundamentals, which will probably continue to suffer from lack of any significant energy or tax reforms. Nevertheless, I do believe that while things are unlikely to get much worse for the country in 2010, the same cannot be said for the likes of Brazil and Chile, which have to live up to investor expectations of a rapid economic recovery in the face of a still-precarious external climate. As a result, these views do highlight that in relative terms at least, there is potential for further re-pricing of risk in Latin American assets over the medium-term.