Bond market in focus: Fixed income expert nordIX on opportunities and risks in Mexico
Mexico is currently in the news because of the flow of refugees towards the US. What does this mean from an investor perspective?
Franck: There are a very high number of refugees who want to travel from Central America to the USA and use Mexico as a transit country. The situation is coming to a head after the recent announcement by US President Donald Trump. He wants to send as a deterrent more than 10,000 more soldiers to the border with Mexico. We feel this primarily as an attempt in the run-up to the midterm elections to mobilize votes. Thus, the situation should not be underestimated, but also not overestimated.
What is your general assessment of the situation in Mexico?
Franck: Very heterogeneous. Mexico is one of the 15 largest economies in the world, is an OECD member and has about 130 million inhabitants, but about half of them live in poverty. Noteworthy is also the high number of refugees, partly due to the ongoing threat of drug cartels. Already more than 11 million Mexican immigrants live in the US, about half of them illegal. However, if one looks at the fundamentals, one should emphasize the far-reaching liberalization and the strongly export-oriented economy. The USA is the most important trading partner. More than 80 percent of exports go to the USA.
That means a lot of dependence on the US and the politics of Trump, right?
Franck: Yes, the lack of diversification of the export-oriented economy is an issue. On the other hand, Mexico will continue to have a high geostrategic importance for the US. Of course, this also applies to internationally operating companies that produce in Mexico, process their goods and export them to the USA. In addition, the diversification of trade relations has become a high priority, so the economic agreement with the EU should be extended.
The Mexican currency has recently come under pressure. Why?
Franck: The last seen weakness of the peso is mainly due to the vote, the several US billion expensive airport in Mexico City not continue to build. In the non-binding vote, 70 percent had spoken out against the airport. This was not well received by the market and the Mexican stock index IPC lost 4.2 percent. In principle, investors remain uncertain after the left-wing politician Obrador won the presidential election in 2018. Although the economic policy statements are now approaching the establishment, its planned restructuring process remains an uncertain factor. For example, when investing in Mexican issuers, care should be taken to ensure adequate export diversification.
And the further conditions?
Franck: The published macroeconomic data were not clear at the end. GDP growth grew by 2.6 percent in the third quarter of 2018 compared to the previous year. Due to existing inflation concerns, the key interest rate of 7.75 percent is at its highest level in ten years. Basically, Mexico's economy is on a solid path. Ongoing weakness in the emerging markets is likely to weigh on Mexico, but will be less affected by US dependency and progress on the Free Trade Agreement. The current political developments in South America, especially Brazil and Argentina should be able to cushion Mexico's economy well. Nevertheless, economic policy developments remain a factor of uncertainty, which among other things led to rating agency Fitch reducing its outlook from stable to negative.
How is nordIX currently positioned in Mexico?
Franck: Our nordIX funds are currently hardly invested in Mexico bonds. But we still focus on the market. In our opinion, state-related issuers - including the state-owned oil company PEMEX - are interesting. The company benefited from the recent rise in oil prices. In addition, there are stable figures in the third quarter with significant improvements. Here we were able to implement a swap as part of our individual stock analysis, which could generate an attractive pick-up against outstanding bonds. In the northIX Treasury plus we have the Fomento Económico Mexicano in stock. It is the largest beverage producer in Latin America and one of the largest bottlers of the Coca-Cola Company. The EUR Senior A-rated senior notes, due in 2023, currently offer nearly 70 basis points of excess return over the swap curve. Third-quarter numbers were above analyst expectations. We assume that the company will continue to develop positively.
What other papers do you consider attractive?
Franck: CEMEX, the third largest cement producer in the world. According to the company, the freeze on the airport has no significant impact on the business, and we expect at least manageable risks. CEMEX is geographically very well diversified and generates a large part of its sales abroad. For this reason, CEMEX bonds should be relatively stable given increased market volatility in the overall market. The company is well on track to improve its credit rating and offers attractive coupons and yields in both euros and US dollars. The bonds have recently lost something and are sometimes trading below 100. Termination opportunities in the near future can generate very attractive price gains. For many investors, however, the rating is an exclusion criterion. S & P rated BB and Fitch BB-.
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