Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Jean Mdecin, member of the Investment Committee at Carmignac Gestion.
Last year was a roller-coaster for emerging-market stocks, as the prospect of the Federal Reserve tapering' quantitative easing (QE) led to a sharp sell-off in the second quarter.
While countries that require international liquidity to fund their current-account deficits will continue to suffer, we are convinced that the excessive and indiscriminate reaction to these concerns by the market has created some interesting investment opportunities.
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Mexico is an excellent example of a country we think is poised to reap the rewards of orthodox macroeconomic policies and courageous economic reforms in 2014.
Unlike some of its emerging-market peers, Mexico has not tried to boost economic activity by keeping interest rates artificially low. As a result, credit growth has remained muted over recent years, allowing the country to keep its current-account balance under control.
This policy has strengthened the credibility of the Mexican central bank, which was able to decrease its lending rates in the second half of the year, even while many other emerging central banks were forced to raise theirs to defend their currencies.
We therefore see good growth opportunities for leading Mexican banks, such as Banorte (US: GBOOY), as credit penetration remains modest while interest rates are getting lower.
Mexican president Enrique Pea Nieto spent his first year in office in 2013 focusing on pushing through ambitious economic reforms. Former oligopolies in the Mexican economy have been broken down by fostering greater competition in sectors such as telecoms and media, while an energy reform bill has just been passed by the Mexican senate.
The bill will allow the state oil company, Pemex, to partner with private-sector firms, attracting foreign and private capital. This is a game-changer for the Mexican economy Pemex revenues account for 12% of the country's GDP and this move should pave the way for greater efficiencies and higher energy production.
We are exposed to positive developments in this market via the petrochemical group Mexichem (US: MXCHF), which is partnering with Pemex to produce PVC. Mexichem also wants to develop its activities in America in order to benefit from the shale-gas revolution.
Mexico's proximity to America should be another growth driver this year, as US economic momentum accelerates. In recent years the labour cost gap between Mexico and China has shrunk, as the cost of doing business in China has grown significantly faster than Mexico's.
As a result the Mexican manufacturing sector has regained a significant competitive edge and is now once again a partner of choice for US industrial companies. We have indirect exposure to this trend though a Mexican real-estate investment trust (Reit), Fibra Uno (US: FBASF), which owns and operates industrial, commercial and office properties.
This year will not be without challenges for the Mexican economy. Political opponents may try to delay, or even block, the implementation of the energy reforms, which are crucial for improving the country's growth potential. This is made even more critical by the fact that almost a third of the government's budget is financed by the energy sector.
However, overall we are much more confident in emerging economies such as Mexico, whose growth potential relies on self-help measures, than in those that are dependent on external liquidity.
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