LatinFinance - September/October 2017 - 23

renegotiations for the Mexican economy
has fallen recently."
Alejandro Padilla, director of fixedincome and foreign exchange strategy at
Mexico's Grupo Financiero Banorte, points
to market technicals such as a stronger
peso, gravity-defying stock gains and low
risk premiums for local debt versus other
emerging markets. Those factors show that
investors now believe the threat from the
Trump presidency to Mexico was overblown, he says.
Trump's struggles with his domestic
agenda - from the failure to overhaul
healthcare to allegations of collusion with
Russian officials - have kept him from
pounding too often on his favorite punching bag during the election: Mexico.
"All of this negative news really weakens
Trump's capacity to carry out his agenda,"
Padilla says.
Richard Segal, a senior investment
analyst on Manulife Asset Management's
emerging markets debt team, remembers
that his firm opted after the election to
adopt a neutral position on its Mexican
holdings, essentially maintaining an existing overweight stance for the coming
months. "The lesson we have learned is
that it's worthwhile to look through negative headlines, to look through the volatility,
because the fundamental Mexican picture
didn't really change that much," he says.
For Santander Asset Management,
Trump's triumph provided an opportunity
to load up on Mexican investments that had
grown pricey before the election. "We con-

GERARDO RODRÍGUEZ, BLACKROCK

"MEXICO - ON THE
SOVEREIGN AND
LOCAL RATES SIDE -
HAS BEEN OUR MOST
IMPORTANT TRADE
SO FAR THIS YEAR"

tinue to look for opportunities in Mexico,
and we have found them in the industrial
sector," said Alfredo Mordezki, head of
Latin America fixed income, who oversees
$800 million in assets under management.
"As much as the rhetoric was against NAFTA, we knew that the industrial sector was
going to generate very good results since
the currency had depreciated so much."
Mordezki feels that nervousness has
decreased - more than anything because
companies have published encouraging
results - but not disappeared entirely.

But what about NAFTA?
Investors see an element of risk in the
upcoming trade talks, although the general feeling is that
NAFTA revisions
Holding steady
will be light. The
Foreign investor holdings of Mexican government debt ($bn)
goals for the dis120
cussions outlined
by the United
States in July
100
brought relief because new trade
tariffs were not on
80
the agenda.
"Mexico had
60
clearly said that
if tariffs or restrictions were
40
established on
commerce, it
20
would walk away
from the negotiating table," says
0
Beatriz Leycegui,
Nov-2016
Jan-2017
Mar-2017 May-2017
Jun-2017
a partner at SAI
Law & EconomSource: Bank of Mexico

ics, who oversaw Mexico's legal analysis for
the original NAFTA negotiations in the early
1990s.
The US outline for trade discussions
represents little more than a cosmetic
overhaul, she says. "But the devil is in the
details," Leycegui warns.
At the same time, aggressive lobbying by
US business groups with interests in Mexico
have helped soften the tone. There's widespread recognition throughout North
America that regional economic integration
benefits all three countries, and that the
25-year-old trade pact could use a facelift.
Mexico's Economy Minister Ildefonso
Guajardo likes to reflect that when NAFTA
was negotiated, the fax machine was considered cutting-edge technology.
Juan Antonio Dorantes, a trade attorney
with Aguilar y Loera, says the US trade goals
have given a little more clarity on the pending talks because "before the size of the
playing field wasn't clear."
Dorantes says his clients, which include
large agro-industrial groups on both sides of
the border, were worried after Trump won
the election. Concerns haven't completely
dissipated, especially since the United
States included wording about reducing the
country's trade deficit in its stated goals.
That objective is disingenuous, Dorantes
says, because, for every $1 that Mexico
exports, 40 cents is content imported from
the United States.
The timeline is tight for trade talks,
with Mexico's presidential contest heating
up and US mid-term elections scheduled
for next year. The 2018 races could inject
volatility into markets, and in particular the
peso, with left-leaning candidate Andrés
Manuel López Obrador (known as AMLO)
leading in early Mexican polls.
Despite the positive karma, Mexico faces
some real challenges ahead. The majority
of global capital holders remain unconvinced that it is a good time to invest in the
country. Dwindling domestic oil production, deteriorating public safety and uncertainty about internal politics top the list of
potential threats to growth.
Investors say it is too early to speculate
on the elections, or to wager on whether
López Obrador will continue to adopt centrist, market-friendly concepts or embrace
radical economic plans and make good on
promises to unwind the country's energy
sector.
The question is, says Harding Loevner's
Schmidt, "Is he going to be good AMLO or
bad AMLO?" LF

September/October 2017 - L ATINFINA NCE.COM 23

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