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Latin America’s Hottest Stocks Pause After $220 Billion Rally

President Andrés Manuel López Obrador’s meddling in the private sector is denting Mexico’s appeal as a safe haven after a stock rally that added about $220 billion in market value in the past three years. 

Abrdn Plc and Brandes Investment Partners are among those that trimmed bets after stock gains left the market expensive compared to regional peers. A surge in the Mexican peso and a bout of political noise — including the government seizure of a private rail line and the scuttling of a long-awaited M&A deal — have given investors reasons to sell, even as they remain optimistic on the country. 

“We did use this opportunity to implement a small trim in positions,” said Eduardo Figueiredo, head of Latin American equities at abrdn. The firm still has “significant exposure” to Mexico, he added. 

Mexican stocks have been a defensive play with their near-monopolies and close ties to the US economy. But a 10% rally in the Mexbol index this year means local companies are now selling at 12 times forward earnings, compared to 9.4 times for Chile’s IPSA and 7.3 times for Brazil’s Ibovespa. 

“It may make sense to take some profit given the relative performance, but I am not making drastic changes,” said Verena Wachnitz, a London-based portfolio manager at T. Rowe Price. “Valuations are not excessive, though as a USD investor I am mindful that the peso has strengthened substantially and is starting to screen expensive.”

AMLO’s recent rail grab, investors say, underscores the risk of government interference ahead of presidential elections scheduled for next year. The government took over part of a rail line owned by billionaire German Larrea’s Grupo Mexico SAB last week — spooking the business community. Days later, Citigroup Inc. scrapped the sale of its Banamex unit, which was 16 months in the making. 

Concerns that the rule of law might be eroded and fears related to the government’s treatment of regulated industries are the main risks, said Louis Lau, a portfolio manager at Brandes who is overweight Mexico, Brazil, Panama and Chile.

Much of Mexico’s strong equity returns in the past few years have to do with the government’s harsh fiscal stance, as it deployed less stimulus amid the pandemic shock compared with other nations. Its central bank was also one of the first to embark on a monetary tightening to tame inflation. That combination allowed investors to look past the political noise. 

The country is also set to keep benefiting from US companies moving their supply chains closer to home, the so-called nearshoring trend that has boosted the Mexican peso to a seven-year high. Shares in the consumer and financial sectors offer opportunities, according to Wachnitz.

While the rail line grab episode impacted investor confidence, that’s unlikely to stop nearshoring, according to Marco Priani, a money manager at Houston-based Vaughan Nelson, which manages $14 billion in assets.

“AMLO has authoritarian tendencies and the more he perceives he has power, the more mistakes he could make from a rule of law/capital markets perspective,” said Priani. “This has not reached a critical point since there are guardrails/opposition to his measures at some political, social and institutional levels, but it requires vigilance.”

Source : BNN