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Emerging Markets: It’s time to look south of the border

Mexico is often overlooked by investors — but could be a buying opportunity right now, says Pendal Emerging Markets portfolio manager JAMES SYME

EMERGING MARKETS provide opportunities for investors with a greater risk appetite.

China, Brazil, Turkey, parts of Latin America, South Africa and Russia have provided buying opportunities at different times in recent decades.

What about today, in a rising interest rate environment when there’s the potential for a recession in Europe and the United States?

Mexico is well worth considering, says James Syme, senior fund manager at Pendal. “It’s a market that’s often overlooked.”

Pendal’s approach to emerging markets is to consider the macro-economic outlook (top down) and marry that with stocks that meet valuation criteria (bottom up). Using that approach, Mexico is looking attractive, Syme says.

“In parts of the emerging world, we have seen very big rate hikes in the last 18 months. Mexico has done 375 basis points since May of 2021. Longer bond yields have moved and there’s been a near doubling of the risk free rate in the country.

“People are still waiting for a downturn in the Mexican economy, and we haven’t seen that. Its because Mexico is a beneficiary of a strong US economy, and the US remains really robust.”

Mexico benefits through its exports, particularly vehicles and automotive parts, and computers. Industrial production in Mexico continues to beat expectations.

The country also has a large diaspora, and it benefits from remittances sent back home.

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Pendal Global Emerging Markets Opportunities Fund

“The vast majority of Mexicans who work abroad send money back home, and remittances are at record highs,” Syme says.

While domestic demand hasn’t matched external demand, Syme says one tends to feed through to the other.

And given rates have risen sharply already, and the economy has withstood the tightening of monetary policy, then Mexico could flourish.

Strong peso

Another factor auguring well for Mexico is the strength of the currency. While the euro has recently traded around 20-year lows against the greenback, and the pound sterling and Australian dollar have fallen to two-year lows, the Mexican peso has mostly been stable.

“That’s pretty impressive … and rational given the strong trade links between the US and Mexico. We think that on a current account basis, the peso still looks fairly cheap.

“Mexico also has a central bank extremely committed to inflation targeting, which should give investors more confidence,” Syme says.

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What about sovereign risk and political risk in Mexico?

“Mexico defaulted on its debt in 1994 so you can’t say there’s no sovereign risk. But Mexico is investment grade from a credit point of view,” Syme says.

“Political risk is more of a stress point. There is a fairly left wing, populist, anti-market President in Andres Manuel Lopez Obrador that has centralised power into the presidency and sought out institutions who might oppose him.”

Syme says while the political landscape is far from perfect, the next Presidential election is July 2024, and AMLO, as he is known, can’t run again.

“Also, Mexico has strong institutions, and its politics are relatively stable. It’s a case of being alert, but not alarmed,” he says.

At the micro level, there’s been a large number of stocks, both domestic and export focused, that have provided positive guidance, or upgraded earnings, Syme says.

“Yet there’s been market weakness, alongside everywhere else.” The main Mexican index, the S&P/BMV Total Mexico Index is down about 15 per cent from its high of late March.

“The price-to-earnings ratio of the Mexican market is at a ten-year low, excluding a brief period around March 2020. And the dividend yield is at a 10-year high,” Syme says.

“And this at a time when the bulk of rate hikes have probably been done, the economy is strong, and we have positive views on the valuation of the currency. Mexico could be a great opportunity.”

About James Syme and Pendal Global Emerging Markets Opportunities Fund

James Syme is a senior portfolio manager of Pendal’s Global Emerging Markets Opportunities Fund with Paul Wimborne.

The fund aims to add value through a combination of country allocation and individual stock selection.

The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.

The stock selection process focuses on buying quality growth stocks at attractive valuations.

Find out more about Pendal Global Emerging Markets Opportunities Fund here
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here

This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at July 25, 2022. PFSL is the responsible entity and issuer of units in the Pendal Global Emerging Markets Opportunities Fund (Fund) ARSN: 159 605 811. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information. Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. For more information, please call Customer Relations on 1300 346 821 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com

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