Last week we wondered if some of the recent outperformance in
the Mexican market might stall as political realities bring
sentiment down to earth.
[caption id="attachment_62167" align="alignright" width="300"
caption="Mexico city at night"]
[/caption]
Almost all presidential candidates ran on a platform of
increased reforms and market liberalization, helping the domestic
Mexican market to withstand some of the negative sentiment in
global indexes.
While the iShares MSCI Mexico Investable (
EWW
,
quote
) is down about a third of a percent the last week, it is still
outperforming the iShares MSCI Emerging Markets (
EEM
,
quote
) with its loss of about 3%, and a 1.8% drop in the S&P
500.
While short-term and long-term opinion remains outperform for
the Mexican market, I do believe some market losses are probable
given global risk and the recent relative performance.
Industrial output for May dropped unexpectedly
by 0.93% from April. The loss was largely driven by a 1.38% decline
in manufacturing and related to the recently weak Institute for
Supply Management reports for U.S. oil production, accounting for
about 35% of fiscal revenues, which dropped 1.9% over the past year
and further signaled the need for energy sector reforms.
Weakness in U.S. manufacturing and a further escalation in
global economic jitters could lead to a further decrease in Mexican
production. Investors should not bet on stimulus from the central
bank. June inflation surprised on the upside at 4.34%, the highest
since 2010 and above the central bank's range of 2% to 4%.
Investors may want to use manufacturing firms and related
investments as a hedge against further weakness, especially with
moderating data in the U.S. Consumer demand should remain fairly
resilient and continue to outperform.
Fomento Economico Mexicano (
FMX
,
quote
) is a strong bet on the domestic market. The company produces and
distributes non-alcoholic beverages and beer, including the
Coca-Cola franchise for the Mexican market. The company also
operates a chain of convenience stores in Mexico and Colombia.
Media conglomerate Grupo Televisa (
TV
,
quote
) is the largest media conglomerate in the Spanish-speaking world.
It has operations principally in the Mexican market and American
market and may stand to gain implicitly with the incoming president
in December, Enrique Peña Nieto, who is married to a well known
telenovela star and close to various board members.
Competition may increase with the upcoming launch of MundoFox,
the Spanish-speaking station by News Corp (
NWSA
,
quote
). The company reports earnings next week with expectations for a
91% jump in earnings to $0.21 per share, though results often
surprise to the downside.
Grupo Simec (
SIM
,
quote
) is a manufacturer and distributor of steel products for North
America and may give back some of its 30.1% year-to-date gains as
manufacturing slows. The company is expected to post a 27% drop in
earnings per share when it reports second quarter results towards
the end of the month.
The country fund holds a 16.3% weight in materials and 9.4% in
industrials, and could be used as a hedge against stronger picks
focused on domestic demand.
