Investors see potential in Mexico’s services sector and in enticing more companies to market and are also bullish about new financial tools which could send billions of dollars into infrastructure and private equity deals.
Expected economic growth of about 4% this year (Mexico), combined with inflation of about 3.5%, compares well to regional peers, many of which are tightening monetary policy to fend off surging prices.
‘In our view, the Mexican economy is very much in a sweet spot. In terms of output, in terms of growth, in terms of inflation, all these dynamics point to a very positive 2011 for the Mexican economy,’ Lupin Rahman, senior vice president of emerging markets portfolio management at bond giant Pimco, told a Latin Finance summit (Mexico).
Mexico’s apparent comeback in the sentiment stakes follows several years in the shadow of Brazil, which weathered the global crisis better but is now wrestling with high inflation.
Emerging market investors surveyed by Bank of America Merrill Lynch in February put Brazil at underweight for the first time in the survey’s history, while preferences for Mexico are increasing.
But Mexico still has some work to do. The economy depends heavily on manufacturing exports to the United States, and while the recovery in US consumer demand has prompted economists to lift forecasts for Mexican growth, investors also look for diversification and for structural reforms.
‘If Mexico can turn the engines and start opening its service sectors it will be a fantastic run for the economy. It can seriously not only grow at 6 to 7% but actually perform much better than the BRICs,’ said Alfredo Thorne, head of global markets at Banorte bank.Brazil’s growth is expected to slow in 2011 to 4.5%, according to the International Monetary Fund.
One major issue is the country’s drugs war which has resulted in more than 34,000 deaths in the last four years. Thorne estimates that is cutting 1 to 2% from annual growth, but says that if Mexico manages to win this war, it will be the most important structural reform it had undergone.
Luis Harvey, co-founder of private equity firm Nexxus Capital, said Mexico’s service sector was underrated. ‘You have a huge internal market which has a per-capita income twice as big as Brazil’s,’ he said. He added that leisure, health and consumer finance are some of the industries getting a lift from the expanding middle class.
New financial instruments are also helping improve Mexico’s reputation among global investors, after bureaucratic hurdles and inertia caused many to lose patience. The country is rolling out new investment options, such as real estate investment trusts (REITs) and a hybrid security designed solely to serve the country’s retirement funds.
‘Now we are seeing real sophistication in the financial marketplace,’ said Juan Alberto Leautaud, a local real estate money manager whose infrastructure investment plan recently won $220 million in pension fund cash (Mexico).
Mexico’s improved investment prospects could attract international investors.
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