US president Donald Trump’s standoff with Mexico’s leader Enrique Peña Nieto has scared plenty of investors away from the Latin American powerhouse but one pair of investors has actually been adding to its Mexican positions.
GLG managers Edward Cole and Simon Pickard, who together manage the GLG Unconstrained Emerging Equity Strategy, believe Trump’s threats will not result in another Tequila Crisis and that there are still pockets of opportunity.
In an investment note, the two put some context to the cross-border trade debate, highlighting that the US had actually increased its exports to Mexico and that around 40% of US manufacturing jobs actually depended on US-Mexican trade.
Though there is no doubt Trump might change the terms, Cole and Pickard believe the worst-case scenario, which has caused investors to look at Mexico as ‘uninvestable’, is unlikely as it would be extremely costly for the US economy and existing US jobs.
Looking to their strategy, which was launched in September 2015, the two have increased their allocation to Mexico.
‘We have been reinforcing existing Mexican positions since the aftermath of the US election, with over 10% of NAV now invested in Mexican equities,’ said the duo.
The two are focusing on high quality consumer staples businesses, with a pan-Latin American footprint, and domestic Mexican banks. Within its top 10 holdings, retail and beverage company FEMSA makes an appearance, making up 3.5% of the fund.
The banking sector is of ‘particular interest’, they said, as domestic credit continues to be very under-penetrated and the country’s central bank’s continued interest rate hikes over the last 14 months was feeding through to higher net interest margins.
They have also recently invested in an infrastructure contractor which focuses on federal and state tolled highways.
While this is a classic long-duration asset that is sensitive to rising interest rates, the stock has declined 35% (in USD terms) since end of quarter one in 2016 and is now pricing in negative revenue growth over the next 5 years, with discount rates staying at their highest levels since the Lehman Brothers bankruptcy.
The note said: ‘This is exactly the sort of opportunity our strategy relishes – the ability to pick-up a high quality business with a visible, durable cash flow profile, at a heavily discounted valuation because of high profile macro headlines that have forced a capitulation by weak-handed holders.’