Viewpoint | José Arnulfo Rodríguez San Martín
International Stock Market Performance (USD) 2011 2012
Colombia Mexico
S&P 500 India DJIA UK
Peru
Europe Japan China Brazil
-19.2 18.3 -13.4 18.0 0.0
11.8
-36.5 9.3 5.5 7.8 -6.0 5.7 -13.3 5.1 -11.4 2.7 -14.5 -0.1 -18.0 -4.7 -27.1 -5.6
Source: Accival with Reuters data
Economic growth and public finances In the next couple of years the two main concerns that investors around the world will face are the following: poor economic growth and huge fiscal imbalances in several of the developed countries, which might lead to sovereign debt downgrades, reductions in bond prices and episodes of foreign exchange volatility. In light of these indicators one is led to the conclusion that Mexico presents a privileged position for investors in a world filled with uncertainty: ● Mexico’s 2012 forecasts for real economic growth fluctuate between 3.5% and 4.0%. This is a pretty good growth rate, especially when growth forecasts for USA – Mexico´s main commercial partner – are under 3.0%. This gained greater significance after the Presidential and congressional elections held in July, which suggest that Mexico is on track to approve structural economic reforms that might be able to strengthen the internal market and contribute an additional source of economic growth.
● With a 40% public debt to GDP ratio and a 2.5% fiscal imbalance for 2012, Mexico presents a solid public finance scheme. Despite these figures international ratings agency Standard & Poor’s has kept Mexico’s sovereign rating at BBB, one notch above investment grade but seven notches below France and eight below Germany. However,
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the Credit Default Swap market has recognised Mexico’s superior credit quality by assigning risk premiums – measured as the spread over Treasury bonds – as only a bit higher than Germany’s and even lower than those for France. This evidence suggests that the markets could be discounting an improvement in Mexico’s sovereign debt rating in the near future.
● The yield to maturity for the 10-year local currency Mexican Bond began 2012 at 7.0%, but by mid-August had fallen to 5.4%, with an increasing effect on the bond’s secondary market prices and therefore producing important capital gains for tenors. This movement could be interpreted as another market reaction anticipating an improvement in the Mexican sovereign debt rating. However, even after this significant adjustment, yield rates offered by Mexican bonds still represent a very attractive investment opportunity, especially for international investors whose opportunity cost, judged against the US 10-year Treasury Note yield, fluctuates below 2.0%.
Fig 2. S&P: Credit Rating vs. 5Yr CDS 800 Portugal 700 600 500 400 300 200 France 100 UK 0 0
AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB Credit Rating (S&P)
1 234 5678 9 10 11 12 Source: Accival with Reuters data 13 Germany Mexico Spain
Ireland Italy
Friendly rate policy Mexico’s foreign exchange rate policy is friendly to foreign investors since it is characterised by absolutely free currency convertibility at market rates, perfect capital mobility without restrictions
Best Execution | Autumn 2012
Credit Default Swap (5 years)
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