Strong growth expected from banks; Attractive market for foreign investment
Enrique Peña Nieto’s victory in the Mexican presidential race is further strengthening bankers’ and investors’ bullish stance on his country’s economy. Although the stock market had largely priced in the victorious candidate’s reformist agenda before the election – there was no immediate surge in the index following the announcement of the election results – the Mexican IPC index is still up nearly 10% in 2012 and is one of the world’s best-performing equity markets.
Nomura added to the sense of optimism about Mexico when it published a report in July that made the bold assertion that the bank believed Mexico would surpass Brazil to become the region’s largest economy within the next 10 years. The report predicts annual growth of between 3.5% and 4.5%, based on the resurgence of the country’s manufacturers as the sector regains its competitive cost base against China.
The bulls argue that Mexico’s competitive manufacturing costs relative to China, its open economy with strong linkages with the US, and its low private-sector and public-sector debt have aligned the country to reap the benefits of a recovery in the US economy.
In particular, the Nomura report highlights the country’s banking sector as the one that will grow rapidly because of its low level of indebtedness.
The report states: "In relative terms, the Mexican banking sector remains one of LatAm’s smallest, particularly relative to the level of economic development. Private-sector debt to GDP is barely 20% versus an average of circa 40% for key LatAm peers and as high as almost 80% in Chile. Given our bullish economic outlook, overall lending growth of 15% to 17% per annum could be sustained."
Other banks had already identified Mexico as the Latin American country with the greatest growth potential. In June, JPMorgan announced that it was increasing its Mexican subsidiary’s balance sheet by $250 million – making it the only country in the region to receive a capital injection from the US bank this year.
|Enrique Peña Nieto’s victory in the Mexican presidential race is strengthening bankers’ and investors’ bullish stance on the economy|
Cepeda says one sign of a maturing market is a growth in local-currency transactions; JPMorgan is responding to that by building a bigger balance sheet to do more business across the board, from bridge loans that lead to equity or fixed-income offerings, to trade and export finance and risk management derivative trades. "All of this uptick in activity will be placed on the book of the Mexican subsidiary, and for that we need more capital," he says.
Jim Allen, head of Latin American M&A at Morgan Stanley in New York, believes Mexico is becoming an increasingly attractive market for foreign companies to enter, either through the traditional route of foreign direct investment or through M&A. "We are still in the early stages of Mexico coming back into favour from a public-market and M&A perspective," he says. "But we have seen an uptick in M&A activity, and when you see the valuations of deals – where the valuations are public, because there have been quite a few private deals recently – they have been relatively high."
Morgan Stanley recently advised brewer Modelo on the price of its sale to AB InBev, which represents a multiple of about 16.2 times ebitda, compared with an average of between 12 times and 13 times for international beer deals: "The Modelo transaction was at a very high valuation, and while it may not be completely representative because it was unique in the sense that it’s a Mexican brand with huge global recognition, the value to AB InBev of Modelo’s leading position in Mexico was clearly high," says Allen.
The IPC’s total market capitalization of the stock exchange as a ratio of GDP is one of the lowest of all OECD members, which suggests room for equities growth. In recent years, corporate valuations have discouraged sellers from listing companies but the stock market’s buoyant performance is changing this outlook. "There will be more equities listed because there is a need for generational planning and the new generation favours stock listings rather than holding concentrated, illiquid stocks," says Cepeda. "There is also the tax incentive because no capital gains tax is levied to public sales as opposed to taxable private sales. Finally, the valuations of the companies listed on the exchange are now at a point that potential sellers are attracted to divest. For example, Walmart’s Mexican subsidiary has a higher multiple than its parent, and you see that in many sectors."
While sellers are becoming comfortable with valuations, there are also buy-side factors to encourage transactions. "There will also be buy-side demand for equity and fixed income as investors appreciate the Mexican growth potential and they are also keen to diversify regional portfolios, which have become quite concentrated with Brazilian credits and equities," says Cepeda. "The growth in the pension system is going to provide a huge base for both the Mexican equity and fixed-income markets."