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Optimism in Mexico

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There seems to be an up growing feeling of optimism regarding the Mexican economy and consequently on Mexican stocks. Let’s start by looking at the performance of Mexico’s only stock exchange, Bolsa Mexicana de Valores (BMV)

Daily candle chart, 5 years

bmv-5y

The major tendency is upward and prices are above its 200-day moving average. However, it is still on a consolidation area somewhat between 40,000 (support) and 45,000 (resistance), which makes a breakout from the resistance an attractive entry. The support around 40,000 seems very strong, with many consecutive touches associated with strong volume – plus the simple moving average can act as a support as well – so technically for long term investors a breakdown of that zone signals the exit position. It is also in line with a channel, highlighting the upward trend.

Daily candle chart, 2 years

bmv-2y

When looking at a smaller scale though, the 2-year daily candle chart, you notice more clearly that in the last few days it broke out of a long-term resistance at 42,500-43,000, thus creating an interesting entry point, where price tendency has almost nothing to stop it until its all-time high at the zone around 45,000. The momentum starts to feel good. Remember that a fall of the actual price (43,550) to its first resistance at 42,500 would constitute a 2,4% loss, and 8,2% till 40,000. If you consider another attractive stop-loss, the line of the channel, it’s between these 2 values.

Fundamental Analysis

The optimism around Mexican economy revolves around the deep reform processes that started when President Enrique Peña Nieto took office in December 2012. Changes are starting to being noticed especially in the energy industry, the government’s fiscal framework, the labor market and the educational system.

The coming federal elections in 2015 and 2018 seem to be making the government eager to attract foreign direct investment, with a particular emphasis in the energy sector. In December 2013 the country’s oil, gas and electricity sector were open after a constitutional reform, and in August 2014 a second legislation established a legal framework for opening Mexico’s energy industry up to private investment. For the first time in 77 years, the long-lasted monopoly ended. And remember the geographical and economical proximity with the US, which have all the know-how in this field and are particularly investment-driven. Energy giants like ExxonMobil, Shell, BP, Repsol, as well as Chinese, South Korean, and Russian oil and gas companies have already expressed their interest. Others players might also largely benefit from this reform, like service providers. And though Mexico has some of the world’s largest and most accessible offshore oil fields, its shale resources are even bigger. The potential for shale oil and shale gas is high, but the expectations rely largely on Mexico’s deep and ultra-deep water resources, which require a more advanced level of expertise on its extraction, especially with shale. The government is thus working on the cooperation with major companies in this industry who “are more than welcome”. Additionally, still, there is also an increasingly powerful renewables sector.

mexico-oil-shale

However, note that these promising new legislations regarding the energy sector face the obstacle of the recent fall in oil prices, as Mexico is an oil producing and exporting country, although the impact is not as big as in other oil-exporting countries, and also because Mexico still imports refined oil. Nonetheless, well-known Ambassador Antonio Garza, Counsel in the Mexico City office of White & Case LLP, who advises companies and investors active in Mexico’s energy sector, noticed that the Mexican government has been preparing for this oil price decline via an extensive annual hedging scheme which can soften the wound, although not completely healing it. And while it is still needed a rebound in prices, optimism remains.

mexico-energy-sector

 It is often mentioned that the general optimism around Mexico’s growth is supported on the growth and health of the US economy, which is still expanding. As we have seen graphically, although Mexican’s economy was more dynamic during 2014, it still suffered a little drawback in the beginning of the year, due to the US contraction at the same time. It later recovered driven by the increase in external demand, which stimulated exports and industrial production. The prospects for a growth acceleration remain around 3,5% in 2015, whereas in 2014 was 2,4% and 1,1% in 2013, assuming that the external demand continues to perform well (in particular, due to the growth in the US), and that economic activity will be supported by structural reforms.

Since it is also still necessary to develop the infrastructure in Mexican’s industry, near-term opportunities should arise in the construction of pipelines, highways, ports, etc. In fact, the government announced an ambitious plan of an infrastructure development to run for 5 years (until 2018), which includes an investment of USD 600 billion (about 47% of 2013 GDP), directed to the energy, transportation and housing sectors.

For this year it is expected that the monetary policy remains accommodative as inflationary pressures should be benign. However, a moderate rise on the interest rate will be required to accompany the rise in interest rates in the US, so that the devaluation of the Mexican peso doesn’t stimulate inflation too much.

In the external sector, it should be stressed that the recovery of the manufacturing activity, in particular the auto industry, has resulted in an improved export performance of non-oil sector. The sector’s performance turned out to be weakened by a drop in oil exports and an increase in import costs, although the impact was not that debilitating, as stated above.

To me, the breakout from the 42,500-43,000 zone constitutes a short-term opportunity, so I would put my stop at the appropriate zone, as mentioned above. But stay watchful in case a of a breakout from all-time highs.

enrique-peña-nieto

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