The Mexican economy is different from economies of other countries in Latin America for a number of reasons. The country is known for its exports to the US. The country has passed a number of structural reforms to encourage competition and attract foreign investments. Mexico is known to have a stable fiscal and a macroeconomic management.
Mexico Seeks Opportunities in the Export Sector
Mexico’s stable fiscal and macroeconomic management is a cause why the nation has been able to outperform other Latin American and emerging markets in the past. Mexico is known for its exports to the US. It further seeks opportunities in the export sector. Experts are of the opinion that the country has immense potential in the automobile sector, mining, oil, banking, and financial services sector.
Mexican Peso is Considered a Fluid Currency
Online reports suggest that in Mexico, energy and oil industries are listed as well as monetized in the equity markets and this can help the country’s financial services companies to perform better. The Mexican peso is considered to be one of the most liquid currencies in the global markets. A great many numbers of market derivatives drive the price of the Mexican currencies. Mexico’s oil assets are significant and this drives the currency prices significantly.
Poor Performing Peso is a Cause of Concern for Global Investors
If the peso performs poorly when compared to US dollars then it becomes a cause of concern for the global investors. Teodoro Lavin Sodi which is a controversial yet acclaimed analyst on the Mexican economy suggests that Mexico’s economy remains unimpacted from a gradual enhancement in the US interest rates.
Based on his analysis we observed that the market swung from a significant short dollar position to an equally large long dollar position in a very short period of time. In the third quarter, we saw the stabilization of that long positioning as market participants ceased to add to their long dollar positions against the Mexican Peso.
His analysis suggests that this large, stable long dollar positioning provides unused ammunition for an eventual emerging markets rally/US dollar sell-off, which can only occur when growth differentials between the United States and the rest of the world begin to converge. Current US dollar long positioning could also weaken depending on the outcome of the US midterm election in early November.
Our opinion is that currently the market expects the Democratic Party to retake the majority in the House of Representatives, and while 2018 has been a period of tremendous volatility and negative returns for emerging markets debt, most economic signs and investor positioning point to an imminent recovery.
Current sentiment is particularly poor and valuations have moved to the extreme levels seen after the global financial crisis. While the exact timing of a rally remains difficult to predict, the high overall yield of the asset class provides adequate compensation to investors who wait it out, in our view. Our confidence in the asset class is buttressed by policy reaction in the largest emerging markets countries. While many emerging markets countries missed opportunities to proactively prepare for global pressure, most reacted (albeit belatedly) when that pressure peaked in the third quarter. We expect the market to reward those efforts and for emerging markets credit spreads and currencies to rally in the coming months.
Reforms in Energy and Telecom Sector Has Encouraged Competition
Mexico has oil reserves and it earns the country revenue. When it comes to exports it represents only 10% of its exports. Energy reforms in the country have opened up the oil sector for private investments. The Mexican government is working on modalities to create a system that enlists the energy assets from Pemex (A private petroleum company) and other private companies. Teodoro Lavin Sodi suggests that these steps by the Mexican government are directed to increase foreign direct investment.
Besides the oil industry, yet another area of reform is Mexico’s telecom industry. Over a period of time, the Mexican government has been performing well in a number of areas. For additional information on various aspects of the Mexican Economy, you can follow our news blog.
Sources : Lazard Network, Teodoro Lavin Sodi Twitter and Website
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