Mexico dodges a bullet in Trump's trade war

published 13 June 2019

951_MW_P05_top_Mexico — AMLO: a rare penny-pincher in Latin America

Donald Trump's decision to call off threatened duties on imports from Mexico closes the latest episode in his trade war "reality show", says Gina Chon on Breakingviews. In return, America's southern neighbour has agreed to deploy its National Guard to reduce the number of migrants heading for the US. The country had little choice but to comply with US demands, says The Economist. A "whopping 80% of Mexico's exports" head north.

A reform story gone awry

Last year brought victory for left-wing populist Andrs Manuel Lpez Obrador known as AMLO in the country's own presidential election. Mexican equities have underperformed global benchmarks over the last five years.

AMLO has set about unpicking reforms of the country's education and energy sectors passed by predecessor Enrique Pea Nieto, whose business-friendly administration was tarnished by corruption scandals.

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One of the new president's "first official acts" was to end construction of a "desperately needed new airport in Mexico City" that was already 30% complete, says Kenneth Rogoff for project-syndicate.org. Although he campaigned on a strong anti-corruption platform, AMLO's administration has "eschewed competitive bidding for more than 70% of the contracts it has awarded". Economic growth has also disappointed. Latin America's second-biggest economy shrank 0.2% in the first quarter of this year.

Still, AMLO differs from a typical Latin American populist in one crucial respect, say John Paul Rathbone and Jude Webber in the Financial Times. He has promised to balance the budget and cut public-sector salaries, including his own.

That has "kept international investors sweet" so far. For all the "unorthodox politics" and "surface turmoil", Mexico has relatively stable economic foundations, reckons Craig Mellow in Barron's. Inflation has plunged 3% in the past 18 months to 4.4.% and "all-but-inextricable links" to US industry bring a measure of reflected economic dynamism.

If the trade standoff between Beijing and Washington really is the new normal, then Mexico is the "obvious base" for US companies seeking a low-cost destination to relocate their factories, adds John Authers on Bloomberg.

On a cyclically adjusted price/earnings (p/e) ratio Cape of 19, Mexican stocks are reasonably priced compared with other markets. With the tariff resolution helping the peso bounce off five-month lows, "there must be a decent chance of a rebound now".

Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.

Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.

He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.

Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.