By Mark Fairbairn, CFA, B.Eng.
Senior Investment Analyst, International Equities
Unlike the more than 1.9 million Canadians who travel to Mexico each year, I have yet to go.
But with the Mexican peso trading at one of the lowest levels in its history, I’m tempted to book a vacation soon. The weaker peso means I’ll get more bang for my (Canadian) buck.
Over the past two years, the peso has been continuously declining against the U.S. dollar. Mexico’s slowing economy, a widening trade gap, sensitivity to oil prices, as well as a slowing reform agenda have all contributed to the drop.
More recently, the peso has been quite reactive to the U.S. presidential race: the currency rises with Hillary Clinton’s popularity and falls with Donald Trump’s.
That’s because if Trump wins the election on November 8, there are concerns it could be detrimental to Mexico’s economy. As part of his campaign, Trump has talked about building a wall to keep Mexicans out, tearing up the North American Free Trade Agreement, and spoken negatively about American companies that invest in Mexico. When Trump’s poll numbers rise, the peso falls.
This was made evident earlier today when the FBI announced it was investigating new information related to Clinton’s emails. The peso dropped sharply as markets perceived a higher chance of a Trump presidency.
However, at the time of this writing, polls continue to show Clinton in the lead. Regardless of who wins, campaign rhetoric is often just that—neither candidate will have free rein to do whatever they want if elected.
In MD Funds with foreign equities, we actively manage both the equity and currency positioning. This past summer, we saw an opportunity in the weak peso and we increased our Mexican peso exposure across our foreign equity mandates. Additionally, the opportunistic component of our fixed income funds also maintains modest exposure to Mexico.
Mexico is being priced like it’s in the midst of a crisis when it’s not. Its underlying fundamentals are much stronger than what’s being reflected in the market.
Having learned from its previous financial crises, Mexico has launched wide-ranging structural reforms. The country has adopted a flexible exchange rate, built up its foreign exchange reserves and is reducing its short-term debt.
To defend against the falling currency, the Mexican central bank has raised interest rates by 1.5% year to date, with a policy rate of 4.75% compared to 0.5% in Canada and the U.S.
Mexico is also reducing its dependence on oil revenues and focusing more on manufactured products. As Mexico’s largest trading partner, the U.S. economic cycle directly affects its non-oil exports and the peso. Given our positive outlook for the U.S., we believe the trade gap will narrow, resulting in a rise of the peso.
We think the peso is still significantly undervalued and when it rebounds, MD portfolios will benefit. And before it does, I’m going to take that trip to Mexico.