12th November 2013
The outlook for Mexico continues to brighten with important reforms to energy and its fiscal framework says Jan Dehn, Head of Research at Ashmore.
In a note issued this week, he says: “A review of market moves in Mexico over the past year or so shows that global events as much as Mexico-specific factors drove the price action. In the past week Mexico passed an important fiscal reform and is now moving onto the equally important energy reform. We expect this reform to pass and believe that the outlook for Mexico continues to brighten”.
He says that it could be a guide to other elections in emerging markets though he also makes the case that “In Mexico’s case the market began to rally early and strongly in anticipation of a benign election outcome which subsequently materialised. The rally was interrupted briefly in May-June 2012 due to reasons entirely unrelated to Mexico, namely concerns about Spanish banks. This European risk triggered the usual mindless knee-jerk selling of EM assets, but subsequently turned out to be a wonderful buying opportunity, because Mexican bonds went on to rally a whopping 40% from the June lows.
“When EM fixed income valuations adjusted sharply lower in late May 2013 on the back of Fed tapering talk Mexican fixed income did not escape the broader market correction. During the most intense phase of selling the market briefly appears to have lost sight of the fact that Mexico is now addressing its deeper fundamental structural constraints for the first time in many years”.
Dehn makes the case for investors not to get caught up in shifting short term sentiment surrounding tapering. “It is important not to get too caught up in the short term volatility caused by the shifting sentiment about tapering and other non-EM matters: Mexico is making the most important strides forward on structural reform in more than a decade and investors who recognise this fact are likely to do better than those who only gamble on short-term market momentum”.
Dehn also draws investors’ attention to an important deal in the Ukraine. “In the past week was the news that international oil companies Chevron and Shell committed to invest serious money to develop Ukraine’s nearly 3 trillion cubic meters of shale gas reserves. Why is this news so important? To see why, it is important to understand the complex and highly challenging domestic and external political landscape in Ukraine. On the external front, Ukraine is critically dependent on energy from Russia. Russia regularly uses its financial and energy might to put the squeeze on Ukraine in a bid to get Ukraine to cede its huge underground gas storage capacity to its Eastern neighbour. Control of Ukraine’s gas storage facilities would confer onto Russia the ability to manage daily gas supplies to Western Europe more effectively, a hugely valuable geopolitical power”.