Oh, Mexico!

Whenever the discussion turns to emerging markets, China, Brazil and India usually drive the narrative (Russia, the fourth BRIC, once did too but now it’s a pariah, drawing interest solely for its impact on resource markets). But the most interesting EM story from our perspective is happening much closer to home. Mexico is our biggest EM overweight—recommended exposure to the country has never been higher in our fixed-income models. Three factors are driving this view:

• A strong economy Mexico GDP grew for a sixth straight quarter in Q1 at a 3.7% year-over-year pace, and its unemployment rate fell to a record low 2.7%. Manufacturing, machinery capex and especially services drove the improvement, with exports hitting a record high. Consumer spending has been robust, abetted by a cheap peso vs. the dollar and by solid job growth. While a potential slowdown in the U.S. would be a headwind, Mexico’s underlying strengths should give its economy staying power.
• Proximity to the U.S. Already on the rise amid growing anti-China sentiment during the Trump years, the shift from “globalization” to “regionalization” exploded in the Biden years as pandemic-driven supply chain struggles drove home the need to have suppliers closer to home. As our No. 1 trading partner and, along with Canada, a signatory to the new Nafta pact, Mexico has been a major beneficiary of this onshore/nearshore movement. Its labor and construction costs not only tend to be the lowest of the three member countries but also are competitive with other emerging markets.
• Solid finances Mexico’s public debt to GDP is less than half that of the U.S., and in the past few years, the government under President Andres Manuel Lopez Obrador has moved to aggressively refinance and extend its debt. Its central bank began tightening a year before the Fed, helping protect the peso and put it in a good position to benefit if the Fed pauses and eventually starts to ease. Further, cash sent home by Mexican citizens working abroad continue to support its economy. So-called remittances hit a record $58.5 billion in 2022, almost all from the U.S., and 12-month remittances grew to nearly in $60 billion through March.

There are other reasons we like Mexico. Many of its public companies are doing well, with solid balance sheets, robust earnings and strong cash flows. There is a diversity of sectors with well-established, well-managed, low-leveraged corporates in which to invest. Combined with the three aforementioned catalysts, and to badly paraphrase James Taylor in his hit, “Mexico,” for investors it sounds so simple, perhaps they just ought to go.