Emerging markets across the world are facing the threat of
capital outflows amid the U.S. dollar's rapid rise, but investors remain
bullish on one developing nation: Mexico.
"Mexico is a market that we like a lot," Jonathan
Brodsky, managing director of Advisory Research, told CNBC on Thursday.
"Recently, Mexican stocks have been priced too expensively for us...but
given what has happened with outflows and the depreciation of the peso,
we're beginning to see a lot more interesting opportunities."
The Mexican peso slumped to all-time record lows at 15.6658 per dollar this week as stellar U.S. employment figures last week stoked expectations that the Federal Reserve would hike rates sooner rather than later, sparking a broad dollar rally. The peso's drastic fall prompted the country's foreign exchange commission to intervene on Wednesday, commencing a $52 million daily
dollar auction that will last for three months.
"Mexico is a market that we like a lot," Jonathan
Brodsky, managing director of Advisory Research, told CNBC on Thursday.
"Recently, Mexican stocks have been priced too expensively for us...but
given what has happened with outflows and the depreciation of the peso,
we're beginning to see a lot more interesting opportunities." The Mexican peso slumped to all-time record lows at 15.6658 per dollar this week as stellar U.S. employment figures last week stoked expectations that the Federal Reserve would hike rates sooner rather than later, sparking a broad dollar rally. The peso's drastic fall prompted the country's foreign exchange commission to intervene on Wednesday, commencing a $52 million daily
dollar auction that will last for three months.
An opportunity at hand
Investors shouldn't be concerned about the peso, Brodsky
said, recommending that they take advantage of its weakness to buy into
Mexico's manufacturing sector, especially companies with an export
orientation.
"We're telling our clients to consider taking some of your appreciated U.S. dollars and think about investing it in powerful overseas exporters that stand to benefit not only in terms of the [economic] rebound in the U.S. but also from green shoots in Europe," he said.
Read MoreWhy investors shouldn't give up on Mexico
Mexico's economy is closely tied to the U.S. – the world's largest economy and its chief trading and investment partner.
"The combined effect of a weaker currency, improved labor markets, and stronger household finances in the U.S. bodes well for [Mexico's] export sector, particularly the automotive industry," said Scotiabank analyst Eduardo Suárez in a recent note.
"We're telling our clients to consider taking some of your appreciated U.S. dollars and think about investing it in powerful overseas exporters that stand to benefit not only in terms of the [economic] rebound in the U.S. but also from green shoots in Europe," he said.
Read MoreWhy investors shouldn't give up on Mexico
Mexico's economy is closely tied to the U.S. – the world's largest economy and its chief trading and investment partner.
"The combined effect of a weaker currency, improved labor markets, and stronger household finances in the U.S. bodes well for [Mexico's] export sector, particularly the automotive industry," said Scotiabank analyst Eduardo Suárez in a recent note.
Show me the data
Economic data underpins investor optimism on Latin
America's second-largest economy. Growth in Mexico's real exports was
considerably stronger between 2010 and 2014 than in the preceding
decade, Societe Generale said in a report two weeks ago, mostly thanks
to increased vehicle exports.
Franz Marc Frei | LOOK-foto | Getty Images
Markets also seemed to have taken notice: Foreigners
currently hold a record 2.2 trillion pesos ($147 billion) worth of
peso-denominated debt, Reuters reported citing central bank data.
"Interestingly, despite fairly broad pressure on emerging markets, foreign holdings of Mexican bonds continue to rise," remarked Scotiabank's Suárez.
"Interestingly, despite fairly broad pressure on emerging markets, foreign holdings of Mexican bonds continue to rise," remarked Scotiabank's Suárez.
An extra fillip
Apart from recent currency depreciation, lower wages are widely cited as another reason to be bullish on Mexico.
"We're seeing a lot of interest from Asian manufacturers to move into Mexico given where wages and the peso are," Brodsky of Advisory Research said.
Real wages have declined 25 percent since 2007, according to recent Societe Generale data – a major factor underpinning the competitiveness of Mexican exports.
However, the booming manufacturing sector has come at the cost of consumption.
"So far, the Mexican labor market, and therefore private consumption, have failed to see any meaningful benefit from trade-led growth. Between 2009 and 2013, the unemployment rate declined slowly but remained higher than before the 2008-09 financial crisis," Societe Generale said.
"We're seeing a lot of interest from Asian manufacturers to move into Mexico given where wages and the peso are," Brodsky of Advisory Research said.
Real wages have declined 25 percent since 2007, according to recent Societe Generale data – a major factor underpinning the competitiveness of Mexican exports.
However, the booming manufacturing sector has come at the cost of consumption.
"So far, the Mexican labor market, and therefore private consumption, have failed to see any meaningful benefit from trade-led growth. Between 2009 and 2013, the unemployment rate declined slowly but remained higher than before the 2008-09 financial crisis," Societe Generale said.
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