Post-Election Mexico Remains A Buy

Despite concerns about the newly elected government, continued drug cartel violence, and the wave of resource nationalism sweeping much of Latin America, we reiterate our view that investors in Mexico and the Mexican markets will outperform.

What “failed state”?

In 2009-10, negative perceptions about Mexico hit an all-time high. A number of forecasters and think-tanks, including the U.S. Army’s Southern Command, predicted that Mexico was on the verge of becoming a “failed state”. In our initial country report on Mexico in March 2010 (Mexico: Too Strategic to Fail with Strong Long-Term Fundamentals”, NBF Geopolitical Research), we argued that “Mexico’s social, political and economic fundamentals are far stronger than what proponents of the ‘failed state’ thesis pretend”.

Since then, the Mexican economy has outperformed most Latin American economies, and the Mexican Bolsa (up 30.5%) has outperformed most other global stock markets. In this update, we reiterate our bullish view on Mexico. We believe that:

(i) The rebound in economic growth after the 2009 recession is sustainable
(ii) Drug violence does not represent an existential threat to the state and that it is likely to decrease
(iii) The new government will follow through on its promises to reduce PEMEX’s stronghold on the oil sector
(iv) Mining companies will continue to benefit from a favourable investment climate
(v) The political system will become gradually more democratic and transparent going forward.

The politics of Mexico: Endemic corruption or the consolidation of democracy?

The election on July 1st of Enrique Pena Nieto of the Institutional Revolutionary Party (PRI) – along with the strong showing of the PRI in congress (240 of 500 seats) – has been viewed with much scepticism. The PRI had ruled Mexico for 71 consecutive years, a period widely associated with corruption, cronyism and autocratic rule.

In the short term, media headlines have been focused on the legal challenge which defeated Presidential candidate Manuel Lopez Obrador has filed with the Federal Electoral Institute (IFE). While Lopez Obrador – from the left-wing Democratic Revolution Party (PRD) – lost by more than three million votes (38.21% to 31.59%), he has formally accused the PRI of purchasing and manipulating millions of votes, and of overspending. Tens of thousands of Mexican youth have been demonstrating regularly in Mexico City to denounce the election and what they view as media bias in favour of the PRI candidate.

In 2006, Lopez Obrador lost the Presidential election by 0.5%, and accusations of fraud and irregularities caused significant havoc in central Mexico. This time, however, the Federal Electoral Court’s impending ruling in September, which will likely validate Pena Nieto’s victory, is unlikely to create much disruption. The President-elect will be officially sworn in on Dec. 1st.

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