AMLO’s Mexico: No Need To Be Terrified
“I’m terrified,” said one Mexican fund manager dealing with high net worth individuals in Mexico. He was talking about Andres Manuel Lopez Obrador, better known as AMLO. He’s been president for all of four months, but according to one money manager who did not want to be quoted on the record on this issue, he “has never seen” so many rich Mexicans taking money out of the country and parking it in the U.S.
Since he took over in December, AMLO has canceled a new and much-needed Mexico City airport on account of concerns that the contracts were crony capitalism and those days are over. Lenders to the developers panicked. Some members of his party, the National Regeneration Movement, said AMLO would tax or ban certain bank fees. During his campaign he said he would review the previous president’s policy to open offshore oil drilling to foreigners, a business once solely in the hands of Pemex, an oil company barely firing on all four cylinders. As everyone knows, the market hated all of these things.
Yet, the pueblos loved AMLO. Obrador is by far the most popular president in all of the Americas. No one comes close.
“I’m not terrified,” says Jin Zhang, a portfolio manager at Vontobel Quality Growth, a $30 billion family of funds that is part of Vontobel Asset Management in New York. “To us, it looks like so far so good for AMLO.”
Over the last four weeks, AMLO added to investor concerns that he might be more left of center than perceived. On March 26th, he demanded Spain and the Vatican apologize for years of colonization and the destruction and later outcasting of indigenous communities from the Mexican power structure. It sounded like the group of Democrats calling for reparations for slavery.
On April 15, AMLO said he wants to create a “Robin Hood” institute to return goods stolen from the public. At first blush, it looks like a call for reparations for historic harms. Instead, AMLO’s idea was to create a fund where goods such as real estate and cars bought for through corrupt practices, or illicitly, would be sold off with the money used for the public good.
“He makes me nervous,” says Luiz Maizel, co-founder and senior managing director for LM Capital Group in San Diego. “He’s surrounded himself with friends and put them in top positions. They are everywhere: in energy, in the courts,” he says, listing others.
To cut costs and live frugally as Mexico’s first president of the people in many generations, he flies coach and has fired the top 100 wage earners in Mexico’s Treasury Department. Salaries have fallen for public employees at the top of the food chain, dropping by as much as 40%.
LM Capital holds nearly $1 billion in Mexico debt, most of it dollar-denominated.
“If you ask me why the peso is where it is today the only thing I will tell you is it’s because of the U.S.,” Maizel says. The peso is holding steady just under 19 to 1. When Trump was elected and Nafta was thought to be dead-in-the-water, it hit as high as 23 pesos to the dollar.
Mexico’s strong peso has a lot to do with the fact that the U.S. Federal Reserve is on pause with rate hikes.
“Mexico is one of those countries where you get in because you are convinced the country is not going to default. Investing there right now, especially for corporate investors, is a lot like falling off a building. It’s ‘so far so good’…until you hit the floor. Then it’s not so good,” Maizel says.
The iShares MSCI Mexico (EWW) exchange-traded fund, one of the easiest ways to invest in Mexico, is up 12.5% this year, just barely underperforming the iShares MSCI Emerging Markets (EEM) index. The dollar is down 3.56% against the peso this year, compared to gaining more than 1% against the Brazilian real, the largest economy in Latin America.
“The reality has not been as bad as the headlines,” says Chris Gaffney, president of world markets at TIAA Bank. “AMLO’s popularity has been buoyed by the economy. He’s not getting in the way of growth,” Gaffney thinks
Even so, Zhang at Vontobel is not willing to put more money to work in Mexico.
“All the concerns about AMLO is not without reason,” he says. “
Vontobel’s two favorite Mexican holdings are, like the economy itself, tied to U.S. brands. WalMex is up over 68% in the last five years. FEMSA, the holding company that is in charge of Coca-Cola in Mexico, is up 52.3% in the same period.
“We are long term investors and when you are a long term investor you are looking for companies with track records of good growth,” he says, adding that good companies in Mexico will still be good companies, with AMLO or without.