The MXN is the most undervalued currency in our valuation framework: it could be close to 40% too cheap, we think. The focus of this note is some of the peculiar structural features of the Mexican economy, against which this currency misalignment estimate should be assessed. Many of these traits are not positive, and are exposed to the cross-currents of the global economy. We think that there may be a bit more downside to MXN in the near term, before it can be supported by valuation.
- Despite joining NAFTA, the economic growth rate of Mexico has been remarkably slow in recent decades, not only compared to its own past but also relative to many other Latin American economies. It is just not evident, by eye-balling charts on Mexico’s macro data, that NAFTA has had any meaningfully positive effects on the Mexican economy.
- Mexico does not compare well with the UK. While both MXN and GDP are undervalued currencies, the UK’s fundamentals (economic and otherwise) seem superior.
- Mexico has been on the wrong side of China’s rise: it is not a producer of goods and services that China consumes but is more of a competitor to China’s production. Not good.
- Mexico can also be compared to Central Europe – in both cases, the more developed partner country (the US and Germany in the two respective areas) provides the technology and owns the factories in the lower labour cost countries. Years of outsourcing, however, have led to very little technological spillovers and the main beneficiaries have been the multinational companies in the US and Germany.
- Mexico is the opposite of South Korea. The contrast is stark, especially if we remove the protection that NAFTA provides Mexico.
- The inability of Mexico to break out of the middle income trap is a lesson for China.
Mexico has grabbed some market attention lately, not only because of the policy declarations made by President Trump, but also because of the intense currency depreciation that the MXN has experienced, both before and after the US Elections in November 2016. We think the case of Mexico is very interesting now because it seems to be at the crossroads of multiple global issues that are being discussed, and areas in which we are witnessing policy movements. This note summarises some of our thoughts and observations.
The bottom line
The world is experiencing many changes and some underlying structural tensions have surfaced. Brexit and Mr Trump are outcomes of these tensions. At the same time, the inconsistencies between trade regionalisation and trade globalisation have also become more evident. But while the UK has been restrained by its EU membership from fully participating in the global economy, Mexico has been sheltered by NAFTA from the fiercely competitive forces from the rest of the world. We see Mexico as being at the crossroads of many of the issues that are being discussed at present, and the only positive for the MXN is its cheap valuation.
The above article is an extract from our research paper “Some Thoughts on Mexico and the MXN” published on January 26, 2017.
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