A little more than a week after Donald Trump’s surprise election victory, a growing number of emerging market fund managers are saying a selloff in Mexican assets may represent a buying opportunity.
Mexican stocks, currency and debt have been hammered since Trump’s surprise victory last week, fueled by concern about the U.S. president-elect’s campaign promises to renegotiate or scrap the North American Free Trade Agreement.
The Mexican rout was the most dramatic part of a wider emerging markets slide that reflected not just anxiety about Trump’s anti-trade views but also the prospect of higher U.S. yields stoked by increased stimulus under the new administration.
But some emerging market investors are expecting a bounce-back, betting President Trump could be less inclined to implement protectionist trade policies than candidate Trump.
“Our base case is that President-elect Trump will be more pragmatic relating to trade and immigration,” said Chuck Knudsen, emerging markets equity portfolio specialist at T Rowe Price. “We think he’ll try to find ways to work within NAFTA.”
The prospect of introducing mass changes in U.S. trade policy will prove much more politically and economically complicated than the president-elect realizes, said Mark Burgess, chief investment officer of Columbia Threadneedle Investments, adding that he viewed Mexico as a “buy” for the long-term.
Trump also has more “low-hanging fruit” to focus on domestically, including proposals for infrastructure investment and tax cuts, repatriation of corporate assets and overhauling regulations, said Alejo Czerwonko, director of emerging markets investment strategy at UBS.
Even in the short-term, some investors see Mexico as ripe for bargain-hunting, with the MXSE IPC index’s .MXX price-to-earnings ratio at its lowest since August 2015, according to Thomson Reuters Eikon data.
“I would buy now absolutely – with a 2017 perspective,” said Didier Saint-Georges, a member of the investment committee at Carmignac Gestion, speaking at the Reuters Investment Summit in London. “It could well be the top performing emerging market next year for all I know.”
Though many investors appear bullish, such views are far from unanimous.
BlackRock’s Global Chief Investment Officer of Fixed Income Rick Rieder, whose firm last year upped its emerging markets exposure, now says he is stepping back from the asset class as a whole.
FIS Group’s chief investment and chief enterprise officer Tina Byles Williams said Trump’s “notably fluid” positions have taken her from neutral on emerging markets to underweight.
Lipper data showed on Thursday that inflows to emerging markets equity funds declined to the lowest level since August 2015 and emerging market debt funds saw their largest withdrawls on record.
If Trump were to actually implement his campaign promises, “there’s downside from the perspective of any (Mexican) asset class you look at,” Czerwonko said.
That worry helped Mexico’s peso fall as much as 17 percent to an all-time low after Election Day. Mexico’s economy was already plagued by shrinking growth rates and sagging oil revenues, making its currency one of the world’s worst performers even before Trump’s victory.
The selloff has roiled all of Mexico’s financial markets, with the BMV stock exchange falling more than 7 percent since the U.S. election, touching its lowest since June. The dollar-denominated MSCI Mexico Index has plunged as much as 19 percent.
Still, the slide in the peso, down 12 percent since the election, will bolster the Mexican economy by reducing the price of labor, Saint-Georges said.
“The Mexican economy is today more competitive than it was a year ago, just about,” he said.
Some investors are putting such views into action. U.S.-based funds investing in Latin American stocks netted $672 million in cash during the weekly period through Nov. 16, the most since September 2013.
The $1.7 billion U.S.-listed iShares MSCI Mexico Capped ETF (EWW.P) attracted the most money among funds in that category, sweeping in $627 million for the week.
Javier Murcio, senior sovereign analyst for emerging market strategies at Standish, a division of Bank of New York Mellon Corp (BK.N), believes even if Trump does intend to scrap NAFTA, Republicans in Congress would be reluctant to get onboard.
“Even a more radical call from the Trump administration to repeal NAFTA in practice will really mean open negotiations to change or update certain areas,” he said.
The dollar climbed to a 3-1/2-month high against the yen on Thursday as markets weighed how President-elect Donald Trump’s policies could affect economic growth.
The greenback rose more than 1 percent to 106.94 yen for the first time since late July JPY=. The dollar .DXY also rose 0.3 percent against a basket of major world currencies, touching its highest in more than two weeks to hover just below levels last seen in early February.
“It’s a continuation of the post-election response,” said Ian Gordon, FX strategist at Bank of America Merrill Lynch. “For us, the clean sweep of both the White House and the Congress by the Republicans is a clear signal that we are going to get a pretty significant fiscal stimulus in 2017 and that is going to be bullish for (interest) rates.”
Expectations that Trump’s policies would boost spending and inflation helped U.S. long-dated Treasury yields rise to their highest in more than 10 months. Yields on benchmark 10-year notes and 30-year bonds had their largest one-day rise in years on Wednesday and added to gains on Thursday after a weak 30-year bond auction. [US/]
Higher interest rates for U.S. Treasuries raise the value of the dollar by making dollar-denominated assets more attractive to investors.
The Chinese yuan CNH= weakened past 6.80 per dollar in the offshore market on Thursday for the first time in more than six years on fears that Trump will act on the protectionist rhetoric that ran through his campaign, particularly regarding trade with China.
The Mexican peso MXN=, also weakened by worries over Trump’s campaign proposals on trade, fell to a low of 20.64 to the dollar, nearing its all-time low mark touched on Wednesday.
Trump’s election also bolstered the British pound, which rose to a one-month high against the dollar, as the president-elect’s call for renegotiating trade deals set the United States and Britain in line to potentially join forces.
“You’ve got President-elect Trump in the U.S. along with Prime Minister (Theresa) May and they’re both talking about trade relationships,” said Douglas Borthwick, managing director at Chapdelaine Foreign Exchange. “So you’ve got two relatively novice politicians that I think will rekindle the special relationship between the U.S. and the U.K.”
The New Zealand dollar fell almost 1 percent NZD=D4 after the central bank cut rates on Wednesday and signalled the possible end to easing.
The euro fell to $1.0865, its lowest against the greenback since Oct. 25 EUR=.
The dollar rose to its highest in nine months against a basket of major currencies on Friday and posted its best week in a year as investors packed on bets that the administration of President-elect Donald Trump would pump up U.S. inflation.
Investors expect Trump’s proposals to deport illegal immigrants, renegotiate free-trade deals and unleash large fiscal stimulus measures will boost U.S. inflation.
The dollar also extended gains against the Chinese yuan and Mexican peso to historic levels on expectations that emerging markets will suffer most if Trump turns his protectionist rhetoric into action.
“Everybody loves U.S. assets, so hence why the emerging markets currencies and equities and obviously their own bonds are all under pressure,” said Dean Popplewell, chief currency strategist at Oanda in Toronto.
“We continue to see the squeeze in emerging markets. Certainly people will want to move their capital, stateside at the moment, and with higher rates and reflation and inflation U.S. Treasuries will eventually be coveted,” he added.
China fixed the yuan another 0.2 percent lower at 6.8120 per dollar and less tightly controlled offshore rates reached as high as 6.85 yuan CNH=, pointing to expectations of more losses. It was the lowest for the yuan against the dollar in six years.
Currencies associated with the Trans Pacific Partnership were lower across the board amid news on Friday that Trump’s election had effectively made the trade deal with Asian and Latin American nations a nonstarter for the U.S. Congress.
The Mexican peso MXN=D4 sank 3 percent to a record low of 21.395 per dollar and the Canadian dollar fell to its lowest since February.
In South America, Peru’s sol fell to its lowest since March against the dollar with the Chilean peso falling more than 1 percent.
The euro fell to its lowest against the dollar since March, touching $1.0836 EUR=.
The dollar erased most of its losses on the day against the Japanese yen JPY= to trade little changed from late Thursday’s levels. It gained 3.5 percent versus the yen for the week.
The dollar index .DXY, which tracks the dollar against six rival world currencies, rose more than 2 percent this week, its best one-week gain since November 2015.
Mauricio Macri’s presidential election victory in November was a clear signal to Diego Saez Gil that it was time to move back to Argentina and take his growing “connected luggage” startup with him.
By the time Macri took office the following month, Saez Gil was already staffing an office for his Bluesmart baggage company in Buenos Aires’ Palermo neighborhood, on the way to hiring 21 software developers, designers and customer support personnel – more than double the staff at its headquarters in New York.
“We started thinking about the talent we needed to scale the company, and at the same time we saw the new government,” Saez Gil said in a telephone interview. “That was the catalyst to say Argentina seems a really good place to go.”
As he looks to grow his company, which produces luggage that automatically locks and can be tracked via a smart-phone app, Saez Gil said his home country offers the best mix of startup-friendly cost structure and a highly educated population with engineering skills.
And when Macri removed long-standing currency controls, eased reserve and deposit requirements for overseas investors and cut a deal with its foreign creditors, effectively reopening international debt markets, Saez Gil was convinced Argentina would no longer scare off potential investors.
Like other tech business leaders interviewed by Reuters, he was also attracted by the potential of the president’s now-passed “entrepreneurs’ law” allowing businesses to more easily be incorporated.
Under pressure to turn around a sagging economy long reliant on commodities like beef and soybeans, Macri is hoping a nascent tech sector can provide a fresh source of growth.
Raising investment in the tech sector to 1.5 percent of gross domestic product is one of his government’s key goals as it looks to boost production and employment.
While pleased with the new government’s first steps, Saez Gil and other Argentine business owners such as Martin Migoya, co-founder and chief technology officer of services provider Globant, say Argentina still lacks the kind of market liquidity and depth needed to list their shares there.
Additionally, the country’s size presents a problem.
“Argentina is a good market, but it’s not big enough to think about a multinational company just serving Argentina,” Migoya told Reuters in a phone interview. “So by definition, entrepreneurs in Argentina need to think in a global way. That’s not very common and we need to foster that.”
If Bluesmart eventually goes public, as Saez Gil hopes, the Nasdaq is a more likely venue than Buenos Aires’ stock market. Local Argentine investors have a better handle on businesses like mining, agribusiness and utilities than tech, he said.
That limited awareness is just one of several obstacles to tech expansion in Argentina. Business owners say that even under Macri’s more business-friendly administration there are still many challenges that include stifling taxes and difficulty obtaining financing from banks.
Nevertheless, in a development that could help more tech startups, a growing number of multinationals have in recent years outsourced thousands of positions to Latin America’s third largest economy.
Companies such as JPMorgan Chase & Co, Citigroup Inc, Accenture and Chevron Corp have shifted research, accounting and call center jobs in English and Spanish to Argentina.
The moves, most of which predate Macri’s election win, take advantage of Argentina’s relative abundance of bilingual college graduates. They have made it a hub for “near-shoring,” in which companies outsource to Latin America rather than to distant locations like India and the Philippines.
Chevron, for example, has for about a decade employed staffers in Argentina who provide accounting services and IT support for many of its affiliates in Latin America, the United States and the United Kingdom.
JPMorgan last year opened its first Latin America-based global support hub in Argentina, months before Macri’s election.
The bank, which previously had only an investment banking operation there with around 140 employees, now has about 700 with some 100 in roles like software development, systems analysis and securities processing, the bank’s senior country officer, Facundo Gomez Minujin, told Reuters.
The outsourcing moves could foster a virtuous cycle creating “a large body of technically savvy and technically trained people,” said Sramana Mitra, founder and CEO of One Million by One Million, a global support network that includes Hernan Kazah, co-founder of Argentine online auction house MercadoLibre Inc.
Gomez Minujin said JPMorgan plans to hire nearly 400 more tech workers in the next year in similar roles to the initial 100, many of whom will serve U.S. operations and clients.
Overall, Argentina’s outsourcing, or “near-shoring” sector boasts 105,000-115,000 full-time equivalent positions (FTEs) in global services, according to industry tracker Everest Group.
That makes it the leader in South America and only about 20,000 FTEs behind Latin America tech services leader Mexico.
“Despite macroeconomic instability in recent years, Argentina continues to witness new center set-up activity,” said Salil Dani, Everest Group’s vice president of global sourcing.
In the last 24 months, 12 new outsourcing service providers have opened there, matching Mexico and more than doubling the pace in much larger Brazil, Everest data shows, although still well behind India.
They are attracted by Argentina’s time zone and cheap currency, down more than 75 percent against the dollar since 2011. But many also rave about its workers’ English and engineering skills.
“Argentina is the best place in Latin America for setting up shop,” said Dileepan Siva, chief revenue officer at digital commerce software provider Moovweb who has a long history working with tech companies like eBay Inc and Twitter Inc.
Mentoring and networking groups such as Endeavor, started in Buenos Aires in 1997 by two Americans, have helped connect startups like Bluesmart’s Saez Gil with those who own multinational companies, like MercadoLibre chief executive Marcos Galperin.
Tech champions MercadoLibre and Globant as well as community listings firm OLX and travel site Despegar – all valued at more than $1 billion – were the stars of the only session Macri led at the recent Argentina Business and Investment Forum organized by his government in Buenos Aires.
Macri’s embrace of the tech sector is not new. As mayor of Buenos Aires he created a technology district and awarded companies that opened or moved there a 10-year tax break.
But there have been no targeted steps to bolster the sector since his election, and the government’s most recent budget aims to cut funding for the Ministry of Science, Technology and Productive Innovation by more than 30 percent.
“We’re not expecting the effort in technology from Argentina to come entirely from the public sector,” Finance Minister Alfonso Prat-Gay recently told Reuters in New York.
“It’s about deregulation, opening up the conditions for local and foreign players to be involved. So I think it’s wrong to just look at the budget and conclude that our priorities are not there.”
Brazilian President Michel Temer on Wednesday promised political stability for foreign investors to put their money in a country weathering the impeachment of his predecessor and the worst recession in generations.
Speaking for the first time to investors in New York, Temer said he was confident he will have enough backing in Congress to pass unpopular fiscal reforms needed to plug a ballooning budget deficit and regain the confidence of markets in the once-booming economy.
Temer, formally sworn in three weeks ago, has managed to approve minor bills in Congress after months of political turmoil that led to the impeachment of his leftist predecessor Dilma Rousseff.
However, the 75-year-old constitutional scholar is already facing divisions within his widely diverse alliance in Congress with some lawmakers promising to water down the fiscal reforms.
The head of his economic team, Finance Minister Henrique Meirelles, told investors at the same event that he saw “extremely high chances” of approval for a key proposal to cap public expenditures.
Meirelles said a controversial reform to reduce generous pension benefits and set a minimum age of retirement will most likely be approved next year.
The proposed reforms and management changes in key state-run enterprises are shoring up confidence in Brazil that is on track for a gradual recovery after two years of recession, Meirelles said.
“Our actions aim to reduce the debt burden and increase productivity,” Meirelles said.
He added that the government could consider selling debt abroad again this year if market continues remain favorable.
Temer, who was in New York to address the U.N. General Assembly, on Tuesday assured world leaders at the gathering that the dismissal of Rousseff was fully constitutional. However, delegations of some leftist governments walked out of the session to express their objections about his legitimacy.
(Additional reporting and writing by Alonso Soto; Editing by Andrew Hay and Chizu Nomiyama)