Down in Mexico?

In the latest episode of the Emerging Market Equities podcast, Nick Robinson sits down with Eduardo Figueiredo to take a deep dive in Latin America. Discussing Edu's trip to Mexico, what the Trump win means for the region and more.

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Nick: Hello everybody. This is Nick Robinson from abrdn and you're listening to the Emerging Markets Equity Podcast, the show that explores the factors that underpin our thinking on emerging markets. We ask our expert guests the big questions, from key individuals to evolving trends, all with the goal to identify and profit from opportunities in the region. So last month, we were joined by my colleague, Ivan Kleimann, to do a deep dive on Brazil. Today we're going to stay in Latin America to talk to our head of the region, who is also based in Brazil, Eduardo Figueiredo. Edu runs our Latin America funds and he's just returned from a trip to Mexico. So given all the changes that have been going on there in terms of domestic and also international politics, he's very well placed to give us his insights on what's been happening on the ground and what the companies in Mexico have been saying. So, Edu, welcome back to the podcast. 

Edu: Thank you. Thank you for having me. It's a pleasure to be here. 

Nick: That's great. Well, first things first. How was the trip? Was it just Mexico City you went to, or did you travel around a bit?

Edu: Yeah. So, this time I did something, well shorter. Typically, we spend the week seeing companies across the country and which involves a fair bit of traveling. But this time I did something a bit more efficient, which was going to one of those conferences and then tagging a few more days outside the conference, visiting some of our holdings. So, I was there for four days, covering mainly, Mexico City. And, you know, one of the challenges in Mexico City is the traffic. So, if you're able to see most companies within a meeting room, that probably makes it a more efficient in terms of number of companies we’re able to see. 

Nick: Yeah, that's good to hear. So how many companies did you see in the end?

Edu:  So, we saw nearly 20 and a bit above that in terms of total meetings, considering, few meetings with, political consultants, local investors and other market participants as well. So, yeah, very good agenda and very well timed, actually, because it was, exactly on the week, of US elections. So, in a way halfway through the week, companies were having to adjust their speech a little bit to the outcome and to think what to say. 

Nick: Yeah, that's great. Well, it'd be great to get a bit of a sense of what companies are now saying in terms of the general view on the ground and whether or not they're optimistic about the outlook.

Edu: Yeah. So, I guess, you know, again, I was there exactly in that week, right where, we got the outcome. The companies saw the announcement of Trump win. And, you know, and they were reacting a bit to that. I think, you know, in general, I think that sort of if we go back a little bit, right, there were two main events that I think companies and investors were monitoring for Mexico. One was, of course, Mexican elections and what would unfold from that. Maybe we can, cover a little bit that but also US elections because inevitably, given how strong, the US is in terms of being the biggest trading partner for Mexico, you know, there was a lot of, anxiety around what this would mean for Mexico in the future. So, in a way, the outcome itself, was a bit surprising for some. But as, as you all know, the polls were fairly split ahead of elections. But the discussion then quickly turned to, you know, how Trump will behave with regards to Mexico and what Trump's means to the USMCA, right. The agreement between US, Mexico and Canada that replaced NAFTA, if the key pillars of that will be preserved. So, I guess, in a nutshell, there was a lot of uncertainty right. And everyone trying to read into the early signs of Trump and that, in a way, took some shine off the very strong operational results we are seeing in many companies, actually, in Mexico right now. So, you know, it was a mixed view, depending on who you were speaking to. And certainly, when we were speaking more, let's say, with the consumer companies and companies that are enjoying, very strong results and still well-positioned for growth, the tone was more positive than the rest. 

Nick: Great. Well, I'm very keen to talk about what companies are saying about nearshoring, but before that, it'd be good just to talk a little bit about one of the drivers of nearshoring, which is this nice kind of friendly trade agreement that exists between the USMCA as it’s now known. Yeah, speaking today where we are in very late November. There has been a little bit of chat in markets about Trump trying to start putting some negotiation positions down on Mexico and how USMCA might be renewed. You know, what's your sense of what's going on there and whether or not the outcome is going to end up being okay for Mexico?

Edu: Yeah. No, that's a good question, Nick. And again, as a reminder, right. The agreement opens for what some call as a review in 2026. And so, negotiations around that probably start formally by the second half next year. But I think the Trump election, in a way, brings that discussion a little bit earlier. And actually, that was one of the expectations, we discussed during the trip with many commentators that Trump would arrive and given his style and even given the need to show some quick wins, you know, how important the first hundred days is for any, US government. So, it was expected that he would be quick in announcing, measures towards, the trade in general, right. In terms of tariffs and so on. And, and I think what we are seeing right now and exactly this week, for example, where we had the announcement of, a 25% import tariff, let's say proposal is something that, you know, caused some volatility. We certainly saw the currency on the day moving and markets reacting to that. But I think we could describe that as an expected move, from Trump as he sort of lays out his, intentions and his negotiations and I think, you know, there are two things here that are important, right. I think one is that, you know, I think the general view is that Trump remains transactional in how he approaches the relationship with Mexico, meaning, yes, he plays a strong card and he, you know, can change his mind quite quickly and so on. But at the same time, even when you read through the announcement and the proposal, it's quite explicit what he wants, right. He, he's focusing on, enforcing, stricter border controls, stricter immigration rules and also strengthening the fight over drug trafficking. So, if we see Mexico reacting towards those, items, and collaborating with the US in moving forward with that agenda, perhaps what we are seeing right now is more of, negotiation tactics, right. Where would he put the worst case on the table and then the country's settle somewhere in the middle. You know, ultimately we need to think what are the incentives and then you go back to the fact that, Mexico and the US sort of supply chain and manufacturing base became very integrated, over the years, you know, of course, you could describe the US as more relevant for Mexico than the other way round with you know, US representing nearly 80% of Mexico's exports. But at the same time, you know, anything that Trump does towards the manufacturing sector in Mexico will impact US companies as well that have that supply chain integration. And also we will ultimately be another inflationary push towards the US economy on top of other measures. So, you know, when you add all those things up and then you add another element which is Mexico remains a very compelling manufacturing destination from a labour cost and even from a logistics, standpoint, you know, you could well be that ultimately, you know, a tariff implementation, as long as it doesn't derail those economics could be absorbed. And then, that doesn't necessarily, again, derail the whole trade relationship and the tailwind that Mexico has enjoyed over the past few years. So maybe that's a bit of a wishful thinking, but it's one that to us, you know, stacks up as a very plausible outcome when we think about the mid to long term alignments and incentives to preserve that relationship.

Nick: Yeah, I mean, the nearshoring trend is an interesting one. I did a, a roundtable for some clients not that long ago. And as preparation for that, I looked through our research database of meetings we've had with companies in Mexico over the years. And I think in 2020, there was something like four mentions of nearshoring. And then in 2023, there was over hundred mentions in our own research on nearshoring. So, it's clearly something that became quite a trend. But I suppose wondering what companies are saying now from your impressions or from your meetings with them. Perhaps it's a bit early, I suppose, given the election, but is your impression that, you know, there might see a bit of pause in that trend and in that, we maybe need to wait for clarity on USMCA for kind of fresh type of nearshoring investments or is that trend intact? 

Edu: Yes, that's a very interesting question, right. And I agree with you. If we do our word count or heatmap, I think, you know, we probably reached the peak of nearshoring narrative. I don't know, maybe second half last year, right, with everyone was talking about investors, companies, everyone was trying to tag into that narrative. And I think just to put something on the table, right. And I think we even discussed this on a on previous podcast that I joined. I think at that time when the hype was on, we were looking at this as an opportunity for Mexico, right. But the numbers itself, in terms of the investments or the demand we're seeing for the industrial warehouse segment, for example, in Mexico, which was a very heated, it still is a hot market. That was more related to, let's say, the traditional industries in Mexico, which were expanding capacity to serve a very strong US economy, right. And a very strong consumption in the US. So whenever we were discussing nearshoring with companies, we're always having to separate a little bit, which was this, let's say, strength that we are seeing from the, yeah, I’ll describe as that is the traditional trade agreements that Mexico had in place and therefore this manufacturing base versus what was a new demand or new companies coming to Mexico from then, the rejigging supply chain, geopolitics and whatnot. Now, I guess it's true that we are exactly in that period where companies are probably waiting for more clarity. So, when I spoke to industrial warehouse companies in Mexico, they described that the market still strong, the long-term fundamentals for why you would move, maybe part of your supply chain to Mexico makes sense, but maybe the decision making drags a bit longer, right. Companies could go into a bit of a pause until they see the final agreements, or at least a good indication of those agreements. And ultimately, the faster we see the proposals being put on the table. And in a funny way, the quicker we hear, let's say the bad news around tariffs and so on. Perhaps the faster companies can put that into their budgeting process and decide again. So actually the companies that are most directly impacted by those trends, the industrial real estate segment in Mexico, they were of course, recognising the challenging environment for demand for new, potential clients coming to Mexico in the coming months and next year. But at the same time, they were, you know, going back to the fundamentals and the basics and still fairly constructive of what can happen in terms of demand potential and so on. If, what we're seeing, of course, with USMCA renegotiation and domestic politics, doesn’t fully derail that trend.

Nick: I guess another risk to some extent, to the kind of FDI and related to that nearshoring Mexico story is this domestic political scenario. And I suppose, yeah, the issue today is that I think Claudia Sheinbaum has now been in place for a couple of months now, perhaps without AMLO’s involvement. So yeah, now that she's in place and in office. Yeah, how's that working out? 

Edu: You know, many companies we spoke were describing the trade angle and USMCA and Trump whatnot as almost more material than what's going on domestically, right. In terms of driving the economy and so on. That there's no way to sugarcoat or overlook, what has happened. So, you know, very quickly, as a reminder, we had, Sheinbaum, we can tag her as the, Manuel Obrador successor, in the party and the candidates that he sort of selected to transfer his political goodwill. Her election was sort of expected there or mapped already, but people expected she would win. But actually, the surprise was how strong the party got, in terms of the representation into, Congress and the Senate, then, you know, quite swiftly or very quickly, we saw as well the controversial reforms that had been laid out by the outgoing president being approved and the expectation that Claudia would tone down some of those proposals and so on actually didn't happen, right. So, we did see controversial reforms being approved in a very swift manner. And those are namely, judicial reform. There is a very complex process in Mexico where individuals will be able to elect their judges and few members of the judicial structure. There's also a reform around revisiting the independence of regulatory agencies in Mexico and sort of absorbing them into the government or the ministries. So, all of those, complex reforms that are seen as a step back in terms of checks and balances and institutions in Mexico and that, of course, that uncertainty, you know, not only in Mexico but in any country where we see a change like that, you see immediate impact in sentiment and therefore, investments in the private sector holding back a bit. Now the sample of companies we spoke and it ranged across sector from infrastructure, banks, consumer names, and even some other regulated sectors. They of course vary with the direction. And describing as a negative direction, but at the same time pointing to some, let's say some silver linings, which are, when the new government seems to have a better dialog with the private sector, from, you know, the first moment when Claudia was elected, apparently she was already calling private sector representatives to engage in dialog and foster that relationship. There is a view that Claudia is, more pragmatic than AMLO and having less sort of personal projects against sectors and so on. As we saw the previous president, implementing and finally, you know, a question whether this pragmatism will show in the coming months as she, sort of establishes her own political capital, you know, gain credibility within the party, and so on. So, there's an interesting setting here where no doubt the direction of travel has deteriorated. But those will be, impacts that we will see more in the long run and perhaps even in an odd way, the fact that we have, both a tighter fiscal balance in Mexico as well as, Trump being elected in the US may enforce this pragmatism that many are expecting. So, you know, still to see, how things will unfold, certainly the domestic politics is something that that is in everyone's radar. But I guess in the end of the day, what we don't know is if the, let's say deterioration in institutions that we are seeing right now, if they will fully sort of offset, tailwinds that Mexico were still enjoying. And the big one that we described was the nearshoring and the trade angle. 

Nick: Yeah. No, that's a good point. I mean, I think of it in a way as yeah, as much as things have deteriorated slightly, the guard rails against things deteriorating a lot are now much higher. So you know, hopefully that keeps them in check because I think the market certainly in the way the currency in the stock market has moved. The market is still a bit skeptical of Mexico, which I suppose, you know, does potentially throw up some valuation opportunities. So, in terms of your trip. Where are you seeing the most interesting opportunities in sectors or companies?

Edu: Yes, that's it. When you, even the dynamics of all meetings with companies in Mexico, this time was spending probably the first 15, 20 minutes or so discussing politics, right. And then leaving the rest for discussing the companies and the very interesting outlook that many of them have. But I guess, you know, a leading indicator is when, a few companies we spoke to in the trip, actually, we moved on from that politics discussion quite quickly because the business itself either is relatively insulated from changes or it has, you know, a lot of, opportunities for growth and penetration. So if you look at Mexico and you could, you know, pick whatever sector you look at, but take a company in consumer sector that, you know, it's expanding its supermarket format and business model, or look into a financial business, that it's playing into financial penetration and financial inclusion, or you speak to an infrastructure company that it's, going through an investment cycle or even the industrial warehouse that we discussed earlier that it's directly impacted by nearshoring, but it's still delivering on a very strong pipeline of demand right. That, he had up until recently, those companies and sectors that yes, you will discuss, they will no doubt be impacted by macro and politics. But they have sort of a self-help element and an opportunity to grow their business and deliver profits that, you know, I would say it's pretty much under their control. Now if you move and you discuss perhaps with more the regulated sectors and so on. This is where we saw most of the concerns going, right. And a bit more, let's say on a wait and see approach. And it's worth reminding, right, that, the Mexican economy, you know, regardless of everything they were talking about political risk, Trump and whatnot, the Mexican economy is slowing down, expectations for next year, are the economy to slow down. Some already expecting that it could grow, only 1%, with estimates being revised down. But within that, we actually see a lot of support for the consumption in Mexico. And one of the things that, these government we believe they will preserve is exactly the support to the lower income and to the social measures and so on, which translate probably into as support to that tailwind we saw in recent years. So actually the cluster of consumer names, and even the financial sector, because of the penetration story, sectors that you leave with an impression that they can deliver very good returns operationally. And then when you look at what valuations are, in today, it does look that there's a lot of pessimism embedded already and a bit too fast versus what, at least those executives are describing to us right now.

Nick: Right, and you cover the financial sector. So particularly interested in your view on this given, I guess, the rise of fintech’s within. I mean, how do you see that panning out?

Edu: Yes. It's a heated topic. I guess, you know, it's been there for a while, but I think what changed, maybe over the past 12, 18 months is more, let's say, headline grabbing. Arrivals or initiatives from fintech’s, and the main ones, are for example, fintech’s announcing, paying up very high yields for deposits. And that was getting a lot of attention. And actually some of those fintech’s, actually having, a lot of traction in gathering deposits with that strategy. So that sort of heated up the debate again. We have Mercado Libre with Pago being very strong. We have several other Latam, fintech’s, you know, strengthening their presence in Mexico. And that's all adding to that, say concern. But there are some differences between markets and one of them, I guess, is the very low level of penetration of credit in Mexico and even penetration of cards. I think even till today, we have, less than half of the adult population in Mexico is penetrated in terms of banking services. We have, maybe, 25% of the population with a credit card. So those numbers are low in comparison with other EM markets. And what this means is that the arrival of fintech’s in Mexico, no doubt they will compete and put pressure on incumbent banks to react, but also they bring an opportunity to bring more people to the financial system in Mexico to play that financial inclusion angle. And perhaps in consulting terms, increase the size of the pie for the market as a whole, right. As, financial penetration and financial inclusion progresses in Mexico. So that's all to say that the impact on incumbent banks is not clear at this stage. No doubt if we spoke to Mexican banks a few years back, I would describe our conversations as Mexican banks, management teams being a bit dismissive of that threat. Maybe, let's say 5 to 6 years ago. Right now, that's no longer the case. All executives, and banks have a strategy. They are very aware they have the numbers of this, newcomers on their fingertips and monitoring very closely their moves. And in fact, they are investing in their own digital initiatives, doing efforts to improve the user experience and so on. So I think, you know, in the end of the day, the pressure is coming. But the way we are approaching this is in trying to identify which banks are either, relatively well diversified and strong operators in terms of different business lines so they can compensate the pressure that we may see, for example in credit card or in some specific lines, or on the other hand, banks that have, and self-help elements to it, right. So for example, we really think that, you know, some of the, the micro lender businesses, in Mexico, stack up as having, you know, a long run away to play that financial penetration angle without necessarily, facing the digital players just now. 

Nick: Great. Well, thanks for that. I guess, you know, thinking about the broader, Latam region. I mean, I guess most kind of emerging market managers are going to look at Brazil and Mexico probably and not spend too much time thinking about the other smaller countries, given the small benchmark weight they have in the broader MSCI index. But yeah, what do you see going on in places like Peru, Chile, Colombia at the moment and that part of the region?

Edu: It's true. It's all, relative call, right. And, you know, I'm again, leading in the Latam strategy. I have, let's say nowhere to hide, right. And we are discussing challenges in Mexico. Well, my colleague, Ivan Kleinman was here, in the last podcast, describing the situation in Brazil. So, in the end of the day the smaller markets, do stack up as having, I think, even a clear picture, a better picture right now, we really like Chile, for example, as we think the country stacks up well, in terms of, strengths of institution, some expectations of more stability going forward and maybe a pick up, in economic activity. Similarly, Peru, it's a bit more challenged on the political point, which has been an overhang and a major drag to the economy, as it has led to investments stalling in the country. But again, some alignment in there to see those investments flowing again. And those two economies are very, tagged to copper prices, right. And mining investments as a whole, where we do have a very positive view. So, you know, as a concept, very constructive, and all that should bring resiliency to the economy as a whole and the currencies as well. Now, the real challenge, particularly with those two countries, is identifying, stock picking and bottom up opportunities that you can invest at scale. So we do have exposure there. But probably less than we, we would like to because of that challenge in identifying those peaks. Colombia has been a lower priority for us to be very upfront. Again, more because of the challenges in finding the bottom up opportunities, to invest in there. And it's an economy that it's more difficult for you to describe as having found that equilibrium, around both the political, element and the fiscal as well. Well one that, you know, it's not in the benchmark, right now, but, in the mainstream benchmarks, but it has a lot of potential and it's getting, a lot of attention is Argentina. We see a lot of positive momentum in there. Plenty of hopes that Mila, delivers its plan, right. It's almost like, a testing ground for economists of, how to try and fix, an economy. But that experiment so far seems to be getting buy in from, not only investors but also, domestically. So, there is a chance that, at some point, if they are really able to find stability, we see a more permanent, sign of stabilisation of especially, inflation in the country and so on that, the country could quickly go back into rate, as in a more in mainstream funds, as well. Right now, I confess, we are monitoring with some caution. We prefer to miss the first rally and then be able to engage when we can have more clarity around, you know, how to value companies with a long term view in mind and ultimately sort of what sort of discount rate, we should use for the country, which is probably a debate, many investors are having right now. 

Nick: Yeah, there's plenty of old research for us to dust down on Argentina isn’t there. I feel like Argentina probably deserves its own podcast at some point, so perhaps I need to rope someone in from our, EM debt team to talk about that at some stage. I suppose, final question. I mean, having come back from Mexico is it changed your view at all on, Brazil versus Mexico and you know, which would be your favoured, investment destination there at the moment between those the two big kind of Latin behemoths.

Edu: Yes, tough call Nick. Both very challenged, and likely to remain volatile for different reasons. And again, what they have in common as well is, having very compelling valuations. I think, you know, very briefly Brazil, we can probably describe as the higher beta proposition, given, you know, the country is more leverage, as you all know, with debt and fiscal, challenge, households are more leveraged as well. So more sensitive to interest rate changes and ultimately more geared to the Chinese economy as well. So any, for the good or bad, but any, stronger response from China could, flow, or result in a, in a support to Brazil. Now, very interesting to observe that, although Brazil you wouldn't necessarily describe as so let's say interlinked with the US from a trade point of view and so on, from a capital point of view and an investment flow point of view, it is, right. And the reaction we saw post Trump election was quite interesting as ultimately the Brazilian assets reacted almost more than Mexico, to that event. So what Brazil is missing is lacking a domestic catalyst. Fiscal, will remain the main debate, right, for Brazil because, the fiscal discipline or at least the commitment with that is what, in the view of many, will allow Brazil to eventually resume the easing cycle and again, hopefully end in a bit more of a positive cycle again. So, one should not forget that, we have relatively short presidential mandates in Brazil. So, again, maybe going into next year and perhaps, you know, by the second half of next year, we could already be discussing potential changes in policy if this government does and doesn't adjust the course, right. So again, Brazil can bring, potential for very attractive gains, under that scenario. But we need to be careful of it's more tactical, and high beta trading pattern. Now, Mexico is where I personally see more of the, structural arguments, right. That, we were talking about, we see a lot of resilience in earnings, very high quality company. Once you look at the mix of companies that you have available in the market. So, that stacks up as relatively more attractive. But again, I cannot deny that right now, we are in the middle of this debate, and it's still a few milestones to go through before you can, you know, have, a clear view around the sustainability of that trade relationship and how this will flow into the economies. So it's probably a time where we need to be, you know, or hedge our bets in both countries, a bit more defensive portfolios. That's what we are trying to do in terms of the type of companies, we select and focusing a lot on bottom up opportunities because, again, valuations suggest that will be a fertile ground for stock picking, in the coming quarters.

Nick: Well, that does feel like a pretty good place to wrap it up. Thanks for all that insight Edu. It was really thorough today. I really appreciate it. Thank you for joining. 

Edu: No, thank you and a pleasure to be here. 

Nick: Great. And thanks to everyone who took the time today to listen in. If you enjoyed it then please download our other podcasts from our website or wherever you normally get your podcasts. Watch out for the next episode and tune in.