Of all my myriad macro market calls of 2012, I am most proudest of my recommendations in successive columns last summer to buy the Mexican peso at 14-14.50 for a potential 12 target against the dollar.
The Mexican peso was the most undervalued currency in Latin America on the eve of a seminal election win by the PRI’s Enrique Piena-Neto.
As remittances from the 13 million Mexican migrants in El Norte surged even as the industrial mantequillas of Monterey and Nuevo Laredo leveraged off the Southwest’s manufacturing renaissance (triggered by a rise in China wage costs and cheap shale oil energy), the peso was a winner. So it did not surprise me that Mexican GDP accelerated to 4.4 in 2Q 2012 and Governor Carstens of the Banco de Mexico went inflation hawkish, as befits a University of Chicago alumn who studied monetarism under Milton Friedman in Gringolandia.
The Mexican PMI was 54.5 in June 2012, among the highest in the world. Statistical data series evoke as visceral an emotional chord in me as Andalusian poetry or Sophoclean tragedies. Hence the eureka moment on the Mexican peso.
Yet the easy money in the Mexican peso and the Bolsa in Mexico City has now been made. US economic softness as fiscal austerity bites will hit Mexican exports and remittances. The PRI’s new structural labour, foreign investment in Pemex and judicial reforms will require a parliamentary finesse that neither presidents Vincente Fox and Felipe Calderon were able to manage. At 42,000, the Mexican IPC index is fully valued as earnings growth estimates of 16 per cent could well disappoint.
As a wannabe Herodotus of emerging markets, I look to historical valuation ranges as my lodestars of value in Mexico. Caramba, hombres! The Mexican IPCA now trades at 16.5 times forward earnings, the top of its valuation range. After all, Mexico traded at 13X forward earnings in 2010. I once traveled by train across Mexico, from the Yucatan to Nogales on the Arizona border and have retained an indelible memory of Mexico’s vastness, its epic financial and consumer potential. The meteoric rise in the Mexican peso far beyond my short term targets makes me reluctant to commit new money to Mexico at current stratospheric valuation levels. After all, the Bolsa has risen 27 per cent when expressed in greenbacks, making Mexico a money gusher south of the Rio Grande for global investors. Viva Mexico!
Like Asia, Latin American shares are growth warrants on global economic momentum though local factors move specific companies. Peru is all about silver and copper ever since Francissco Pizarro plungered the legendary mines of the Incas for the enrichment of Renaissance Spain. Brazil’s Bovespa is dominated by black gold/mining colossi Petrobras and Vale, highly correlated to Chinese PMI and money supply growth.
Chile’s stellar sovereign ratings and pension fund flows make Santiago the low beta market in the region, though the Red Metal is its primary export Colombia, which is my youthful travels was notorious for the violent Medellin/Cali cocaine cartels and the ethereal beauty of Cartagena, has emerged as a major oil exporter after the peace settlement with FARC. Incredibly, Bogota is now the most highly valued exchange in the Americas, at 17 times forward and 3.2 times book. Colombia’s financial resurrection is pure magic realism, a Garcia Marquez tale of a hundred years of solitude since the era of Don Pablo.