Mexico gets its act together
Demand is solid for long-term Mexican bonds in this era of zero and negative yields.
Would you lend to Mexico an emerging economy with a turbulent past for 100 years at just 4.2% a year? It spent much of the 19th century in default on its external debt, and was shut out of international capital markets for a long stretch of the 20th. Then there was the "tequila crisis" of the 1990s.
Not a promising track record, you might think yet Mexico's government sold €1.5bn of 100-year bonds last month, marking the world's first sovereign century issue in euros. Mexico had already sold sterling and dollar 100-year bonds in the past few years, at yields of 5.75% and 6.1% respectively, raising a total of $5bn.
Demand is solid because in this era of zero and negative yields across swathes of the global debt market, 4.2% looks good, notes Elaine Moore in the Financial Times. And borrowers are rushing to cash in. It's a good opportunity to lock in ultra-long financing at rates well below what they would be were they issued in dollars and pounds, says Richard Segal of Jefferies International. Companies including French energy giant EDF have also jumped on the bandwagon.
So the unusual financial environmenthas helped. But Mexico has also got its act together in recent years, "fixing the roof while the sun shines", says Aberdeen Asset Management's Andrew Stanners. Inflation is under control, public spending has been cut in an election year no less and public debt only amounts to around 50% of GDP.
Recent reforms have opened the telecoms and energy sectors to competition and could attract lots of foreign direct investment, says The Economist.
Mexico is a manufacturing powerhouse, accounting for a quarter of US car imports. Its workers are cheaper than China's. The domestic outlook is solid too nearly half of the population is under 25, implying a growing working population consuming more in future. But we'd opt for Mexican stocks, rather than its bonds.
One option is the iShares MSCI Mexico Capped UCITS ETF (LSE: CMXC). It's not exactly cheap, but it represents a long-term bet on Mexico's governance and economy not suffering a relapse into bad habits in the years ahead.