Mexican financial markets have suffered recently from political uncertainties, both internally (newly-elected President Andrés Manuel López Obrador) and externally (the Trump administration). While these factors may impact our $3.5 billion stake1 in individual Mexican companies in the near term, the long-term structural growth opportunities for these companies should continue unabated and they should outpace Mexico’s pedestrian GDP growth. But despite our focus on individual companies in the Invesco Oppenheimer Developing Markets Fund, we have spent a considerable amount of time thinking through policy priorities to address Mexico’s twin principal issues of poverty and social inequality.
Following recent meetings with
corporate executives and ministers of the presidential administration in Mexico
City and Monterrey, we embarked on a concentrated and extensive revisit of our
Mexican holdings. We also spent time as a team better understanding Mexico’s
history and politics. Additionally, we delved
into the structural economic context of this important developing economy and
its parallels across our investment universe. Conversations with Enrique
Krauze, arguably the preeminent Mexican historian, were incredibly valuable in
Mexico is relevant to most
global investors. It is deeply integrated with the United States, in goods,
labor, and capital. It is the third largest trading partner of the United
States with $671 billion of trade in 20182.
Mexican-Americans represent 11.2%3 of total
US citizens and some estimates suggest nearly 4.9 million unauthorized Mexican
immigrants lived in the US in 2017. These individuals represent the bulk of the
$33.5 billion of remittances sent to Mexico last year, or about 2.7% of
Mexico’s gross domestic product4.
Mexico is also the beneficiary of significant foreign direct investment from
decades of increased integration alongside NAFTA. Tourism is one of the most
important industries in Mexico. In 2017, international tourism revenue
contributed 2% to Mexico’s GDP5.
Mexico is amongst the most
significant investment destinations for emerging market bonds and equities
funds. International investors hold $346 billion6 in Mexican
fixed income, which is amongst the deepest and most liquid bond markets in EM.
Although Mexico’s equity market capitalization of $385 billion7 is
modest, it is an important source of investment opportunities for the Invesco Oppenheimer
Developing Markets Fund. We have approximately 6.6% of the fund invested in
seven Mexican companies8 – including
the pan-Latin American retail/beverage giant FEMSA (2.6% of fund assets as of
June 30, 2019); the mining conglomerate Grupo Mexico (1.35% of fund assets as
of June 30, 2019); airport operator Grupo ASUR (0.46% of fund assets as of June
30, 2019); and the dominant consumer retail businesses of Alsea (0.34% of fund
assets as of June 30, 2019) and Walmex (0.5% of fund assets as of June 30,
2019). We are almost 4.5% overweight the MSCI Emerging Markets benchmark’s
allocation to Mexico.
Our investments in Mexico
highlight our unique focus on investing in companies, not countries. We
anticipate that Mexico will likely maintain pedestrian growth in GDP over the
next few years, perhaps amplified by weak private sector investment following the
pivotal election of President Andrés Manuel López Obrador (AMLO) in 2018 and
fledgling conflicts with the Trump Administration over trade and immigration.
Despite relatively tepid macro growth conditions, however, we see companies
with both durable competitive advantages and the capacity to grow meaningfully.
These are companies that are either oriented towards external demand (ASUR,
Grupo Mexico) or able to take market share over time from inefficient (and
largely informal) competitors. The MSCI Mexico index has declined 6.2%
annually, or 27.2% cumulatively9, over
the past five years. This weakness, in
our view, has presented opportunities to invest in high-quality companies at
According to Enrique Krauze, Mexico’s
two principal ancestral problems are poverty and social inequality. Inequality,
perhaps the defining issue of global economic debates today, is deeply rooted
in Mexico. Mexico has amongst the highest Gini coefficients of OECD economies. Approximately
50.6% of the Mexican population lives below the poverty line, defined as $5.4
and $3.5 per day in urban and rural regions, respectively, while 58% of the
country’s population works in informal sectors. Mexico’s ‘middle class’
has remained relatively stagnant over the past decade at approximately 22% of
the population. Mexico’s inequality has distinct regional streaks, with a
reasonably prosperous Northern and National Capital Region and largely
undeveloped Southern Region.
Figure 1: Gini Coefficient*
Mexico, like many other
developing economies, has a dual-track economy. There is a small and reasonably
efficient formal sector, dominated by a handful of large companies across most
of its industrial and consumer sectors. Alongside this is a vast pool of
informal labor and micro-businesses, which are highly fragmented and extremely
inefficient. One of the great investment themes in Mexico – like other
developing countries – has been its companies that gain market share against
inefficient, small competitors and thereby grow earnings consistently faster
than the pedestrian 2-3% growth in the broader Mexican economy.
In July 2018, Mexico followed
much of the rest of the world (Poland, the Philippines, Turkey, India) in
electing a perceived ‘populist’, or perceived leader of national revival. AMLO’s
sweep to power, with both an overwhelming popular vote and unprecedented
control of the nation’s legislature, is largely a result of his close, almost
magnetic relationship with the poor of Mexico and his extraordinary ability to
channel their discontent and hopes for deep structural change in the socio-economic
fabric. Mr. Krauze has called President AMLO a ‘tropical messiah’, someone who
deeply embodies the collective sense of need to tackle Mexico’s social
frustrations – corruption, security, inequality and the absence of social
Like many populist movements
around the world, there is profound concern amongst private capital about the
integrity of institutions which have been built up in Mexico in its brief two
decades of democratization. There is also a gnawing, and worrisome, sense of
fatigue with democratic progress across Latin America – as Enrique says ‘revolution
was sexy, but democracy is hard’. These concerns, among others, has led to a pullback
in private sector investment and considerable weakness in the Mexican
The solutions: an open letter
to President AMLO
As significant investors in
Mexico, we have real skin in the game. And we have communicated ideas and
priorities to the administration. The following are a few critical
considerations, in our view.
1. Focus on execution, not
The priorities are clear –
improve security, fight corruption, and improve social mobility.
2. Inclusive growth is the
Use evidence-based solutions to
figure out the most efficacious methods of improving social mobility. For
instance, Mexico’s current education outcomes are entirely unacceptable – this
is about underinvestment, but also poor accountability. At the same time,
Mexico should not give in to bad union behavior. Mexico pioneered conditional cash
transfers in an effort to break the cycle of poverty. It should learn from the
past and expand on conditional cash transfers to pensioners and youth-at-risk
3. Focus on boosting investments.
Mexico lacks the level of investments needed to speed up economic growth and job creation. Its gross fixed capital formation as a share of GDP – at 22% – is about half of China’s. Mexico’s investment level also trails its EM peers like Indonesia, India, and the Philippines.
Figure 2: Gross Fixed Capital Formation
4. Fiscal investments.
The role of the state needs to
expand over time. Mexico simply lacks the fiscal resources to accomplish its
principal goal of inclusive growth. Government expenditure as percentage of GDP
(~24%) is simply too low to invest in physical and social infrastructure
requirements. This is amongst the lowest in both the OECD and amongst its EM
5. Private Investments.
Private sector investment is
critical to productivity and growth. It is crucial for the country to remove
obstacles to investment and provide incentives to work alongside administrative
goals (development of the South, repairing Pemex, infrastructure building,
education and training).
Figure 3: Government Expenditure to Gross Domestic Product (%)
6. Promote fintech as a pathway
to inclusive growth.
Nearly 32% of Mexican adults have
no access to formal banking services, while an additional 34% of the adult
population has only one financial product10. Partnership with the
private sector – like India has done – can fix this. This requires a rollout of
unique identity cards to each Mexican citizen and the creation of a basic
software stack, which can be adapted from India. Financial inclusion can have
manifold benefits: lower payments and remittance costs; enhanced domestic
savings levels, which fund capital formation (and thereby growth); permit
access to capital for small businesses and entrepreneurs; greater tax
collection and fiscal expenditures through greater visibility.
7. Fix Pemex.
Intellectual flexibility is
necessary in good governance. Pemex is the ‘black swan’ risk to fiscal
balances, the currency and thereby growth and progress. Incentives and
governance must change, the balance sheet must be de-levered (it is the world’s
most indebted company!), costs must be repaired, and production needs to be
fixed. This will require private sector collaboration, or perhaps even
8. Use your mandate wisely.
President AMLO, you have an
unparalleled political mandate and six years to fix many things. Focus on a few
significant initiatives and be sensitive to the integrity of Mexico’s
reasonably young institutions, including an independent Central Bank and its free press. Nurture improvements in
judicial independence and the rule of law, while undertaking massive reforms to
improve social mobility.
1 Invesco as of 5/31/19
2 Office of
the US Trade Representative
Research Center, as of 2015, based on self-descripted ancestry, lineage,
heritage, nationality, group or country of birth
5 The World
as of 3/31/19
Bank Data as of 12/31/18
as of 5/31/19
Morningstar as of 5/31/19
10 HSBC research
Blog header image: © Per Swantesson / Stocksy United
*The Gini coefficient is a statistical measure of distribution often used to gauge economic inequality across countries. The coefficient ranges from 0 (or 0%) to 1 (or 100%), with 0 representing perfect equality and 1 representing perfect inequality.
Emerging Markets Index captures large- and mid-cap representation across 26
Emerging Markets (EM) countries. With 1,198 constituents, the index covers
approximately 85% of the free-float-adjusted market capitalization in each
The MSCI Mexico
Index is designed to measure the performance of the large and mid-cap segments
of the Mexican market. With 26 constituents, the index covers approximately 85%
of the free float-adjusted market capitalization in Mexico
expressed are those of the Justin
Leverenz, are based on current market conditions and are subject to change
without notice. These opinions may differ from those of other Invesco
subject to change and are not buy/sell recommendations.
The risks of
investing in securities of foreign issuers, including emerging market issuers,
can include fluctuations in foreign currencies, political and economic
instability, and foreign taxation issues.
The Fund is subject
to certain other risks. Please see the current prospectus for more information
regarding the risks associated with an investment in the Fund.
Before investing, investors
should carefully read the prospectus and/or summary prospectus and carefully
consider the investment objectives, risks, charges and expenses. For this and
more complete information about the fund(s), investors should ask their
advisors for a prospectus/summary prospectus or visit oppenheimerfunds.com.