Mexican Equities Stand Out In The Region

After all the major Latin American equity benchmark indices posted declines in 2013, we expect most equity markets in the region to remain under pressure this year, as global rebalancing dynamics continue to play out. We believe that equity indices that are highly exposed to softening Chinese demand for industrial metals, such as Chile's IPSA and Peru's IGBVL, will continue to face headwinds in the coming months. The outlook for Brazil's Bovespa equity index, which is also exposed to slowing Chinese metals demand, is further dampened by our expectations of weakening household spending amid an ongoing rate hiking cycle by the central bank. That said, we believe that 2014 will mark an inflection point for Mexico's IPC index, as equities across several sectors will benefit from strong trade and investment ties with an improving US economy, as well as from the recent passage of key structural reforms by President Enrique Peña Nieto.

While the IPC has been the worst performer in the region in the year-to-date ( see chart above), we believe that recent weakness was driven by a temporary bout of negative sentiment on the back of investor concerns over economic growth. Namely, slowing Mexican manufacturing production growth in December and January, as poor weather in the US weighed on activity in the sector, suggested Mexico's nascent economic recovery could be losing steam. However, February manufacturing sector data released on March 3 came in strong, with new orders and production increasing, and we believe that accelerating US demand for Mexican manufactured goods will ensure that Mexico's economy continues to recover in the coming months. Moreover, while expensive valuations had always been a major drawback regarding Mexican equities, the IPC's estimated price-to-earnings ratio is now near its 10-year average. We believe that stronger growth in Mexico, at a time when most other Latin American economies are slowing, alongside recently passed structural reforms passed recently, will bolster Mexican assets in the coming months.

IPC's Recent Underperformance Set To Reverse
Latin America - Performance Of Selected Benchmark Equity Indices, % chg

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Geography: Latin America

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