Country risk: Mexico’s EM attraction questioned

Prickly business: Mexico offers rewards, but it's not quite as appetizing upon closer inspection

Bloomberg has ranked nine of the 10 countries in the JPMorgan EM Currency Index for their attractiveness to investors, using factors such as economic growth, yields, equity valuations and its own forecasts. 

Singapore is considered a developed country and is excluded from the analysis, although the fact Chile could be similarly bracketed is ignored.

According to Bloomberg, Mexico comes out on top as the most attractive and India the least.

China, Russia and, to a lesser extent, Brazil fare badly, but there are better prospects for Chile and Turkey, and a balanced prognosis for Hungary and South Africa: 

However, the rankings are misleading.

Euromoney’s survey crowd-sources the views of more than 400 experts, and on a wider range of risk factors, including economic, structural and political. These are often considered the most difficult to quantify yet also, perhaps, the most important of all.

Take South Africa as an example.

Bloomberg rates it more attractive than India, when in Euromoney’s survey it carries greater risk.

On 52.3 out of a maximum 100 points, and ranking 60th out of 186 countries surveyed – five places below India in Euromoney’s global rankings – South Africa is considered a perceptibly riskier prospect than India. 

That fact is underlined by falls in the rand and bond prices this week responding to the news president Jacob Zuma might be about to sack his finance minister Pravin Gordhan.

Delving into the data, South Africa’s score for its monetary policy/currency stability factor is lower than India’s, with the rand looking shaky and the rupee still appreciating.

In fact, the scores for Hungary, Turkey, Brazil and Russia for the same risk factor are lower than they are for India, and all four countries are below India in the global rankings, making them all riskier prospects, with Russia eight points worse off on the gamut of risk metrics.

Mexico admittedly fares better in the rankings, holding onto 37th place, on a score of 60.5 points, but is still eclipsed by Chile, on 75.5 points in 16th place, which is only marginally behind the US. 

Here again, Chile’s monetary policy/currency stability score exceeds Mexico’s.

The Mexican peso, like the rand, is considered undervalued – and has been gaining. 

There is a hedging programme providing support, monetary policy tightening and less rhetoric from the US, but, as with the rand, the currency is vulnerable to political risk.

“The America-first rhetoric of president Trump and the actions he took during his first weeks in office do not bode well,” says Marijke Zewuster, head of EM at ABN Amro.

Among other negative factors, “some automotive companies have already announced that they would move (part) of their investments to the US and president Trump’s plans to renegotiate Nafta and institute a border tariff for imports from Mexico would deal another blow to the sector”, she says.

ECR data underscore the comparatively favourable prospects of Chile relative to Mexico, which have been improving on the back of higher Chinese and US demand supporting copper prices. 

Others to figure

Bloomberg, of course, makes it clear it only ranks the JPMorgan constituent countries, but by doing so it ignores other safer EM investments than Mexico. They include Taiwan, South Korea, Qatar and Israel, all featuring in Euromoney’s survey.

While there are always reasons to remain cautious on Israel, the next elections are not due until 2019, and the economy is growing robustly, by 4% on average last year. 

There is a current-account surplus, the fiscal metrics are stable and the strong economy is translating into decent employment growth.

Another EM, Malaysia, is only just below Mexico and is struggling to convince the experts in view of the 1MDB scandal and the decision by the central bank to stop foreign investors hedging in currency futures tarnishing its reputation.

Inflation has increased and political risk will begin to dominate Malaysia’s risk profile as the elections loom in 2018. Yet its scores are higher than Mexico’s on most political factors, as they are for infrastructure, industrial relations, debt indicators and credit ratings.

Malaysia lags Mexico on most economic risk factor scores, but infrastructure spending, stronger external demand and gradually rising oil prices supporting GDP growth of around 4.5% in 2017-18, say the ABN Amro team, make it just as attractive an investment prospect.

Mexico is attractive for sure, but what Bloomberg fails to elaborate is that the line is longer at the beauty parade.

This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.