Show me the money
Comment of the Day

December 08 2014

Commentary by Eoin Treacy

Show me the money

Thanks to a subscriber for this report from Deutsche Bank focusing on Mexico. Here is a section: 

Mexico’s growth remains subdued despite 11 structural reforms passed months ago. Thus, baffled investors are now demanding prompt execution of projects to keep alive long-standing goodwill towards this administration.

Sentiment has been further hit by a pick-up in social unrest. We do foresee a marked turnaround in public and private spending in the short term, and prolonged dynamism in 2015-20. In turn, we highlight four themes investors should not miss and potential beneficiaries of these trends.

One developing superpower
Deutsche Bank anticipates approved reforms to support sustained GDP growth above 5% in the long term, practically double the average growth in the last three decades. The Energy Reform alone should contribute incremental GDP growth of 1.6% by 2025. Effective actions to control unrest are paramount to place Mexico in the selective group of developed economies, in our view.

Two signals of turnaround
Industrial production is likely to continue to accelerate supported by rising exports of automobiles (+10% YTD) and construction depicting faster growth (vs. contraction over the past three years). On this, housing starts are up 25% on a trailing 12-month basis and three months of supportive data hint that the downward trend of infrastructure activity has been broken. Three clear short-term catalysts

Round One of the Energy Reform should auction close to 170 exploration and extraction projects in 1H15. In addition, critical mid-term elections in June 2015 should unleash material public spending in the coming months. Finally, major projects under the National Infrastructure Program are starting to ramp up, and several more should be awarded next year. In sum, this means more than US$600bn of investments, equivalent to almost 50% of Mexico’s GDP.

Eoin Treacy's view

Here is a link to the full report.

The structural reforms introduced by the Mexican government over the last couple of years are encouraging from a governance standpoint. Those aimed at the energy sector were particularly welcome since the sector was closed to outside investment for so long. As oil prices decline the question now being raised is whether these reforms were introduced too late to avail of the investment capital chasing shale development. 

The recent downward pressure exerted on the Peso is in no small part related to the price of oil as well as the strength of the Dollar. The Greenback is now testing the region of the 2012 peak near MXN14.5. Some consolidation in this area is looking increasingly likely but a sustained move below MXN13.5 would be required to question medium-term-scope for additional upside. 

The Mexican Index continues to hold in the region of the 200-day MA, at least in nominal terms, and a sustained move below 42,000 would be required to question medium-term scope for additional higher to lateral ranging. 

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