Article January 28, 2021

Mexico: an investment opportunity

Written by

Print Friendly, PDF & Email

I’ve recently deployed capital to three attractive PVT investment opportunities in Mexico within the R&M International High Alpha strategy. These ideas were identified through our stock selection process after Mexico was flagged, amongst other emerging markets, by our quarterly top-down Country Cycle work as being a stock market offering an attractive investment environment. In this note I detail the investment backdrop at a country level, why I believe Mexico will benefit from a robust US economic recovery, and why our three investments were selected and particularly stand to profit from this set-up.

Within our Country Cycle data, which looks back 15 years to capture at least one full cycle, Mexico scores as one of the countries closest to its trough. At the end of Q3 2020, profitability was at its lowest point, although was still very respectable at 2% return on assets (for reference, the US is 2.3%), while valuations were in the lowest 2%. According to UBS research, Mexican equities are trading ~2 standard deviations below their historic valuation premium to other emerging markets.

This is particularly interesting because timing support for an entry point has improved. Mexico appears to offer an opportunity to piggy-back on a US fiscal response to COVID-19 that is unprecedented (probably ending up some 4x larger than the 2009 policy response) and unparalleled globally. With its open economy, low labour costs and geographic proximity to the US, Goldman Sachs estimates a +0.8% impact of US fiscal stimulus on Mexico’s GDP in 2021, double the +0.4% average across Latin America. Over the last 10 years, exports to the US have averaged 80% of Mexico’s total, and it is now the US’s second largest trading partner, with 14% share, after the EU.

This more positive outlook is a far cry from the near perfect storm that the investors in Mexico appeared to face at times over the last several years, firstly with the election of Donald ‘Build the Wall’ Trump into the US White House in November 2016 and then with the election of left-wing candidate Andres Manuel Lopez Obrador (AMLO) to the Mexican presidency in 2018. Both election campaigns featured rhetoric which spooked investors – Trump’s around re-negotiating NAFTA and ‘America First’, and AMLO stoking fears of an anti-private sector administration with elevated risk of forced nationalizations.

The bark has been worse than its bite thus far. A new trade agreement has been negotiated (USMCA) which looks relatively similar to NAFTA. Also, despite the cancellation of a new Mexico City airport a third of the way through completion, plus a 3-year oil auction moratorium, there have been more positive signals such as an infrastructure plan in which there would be high private sector participation.

A recent example of the positive were the terms of the renegotiation of the Master Development Plan – which mandates capex requirements and tariff increases – for Grupo Aeroportuario Centro Norte (OMA). This was a nice fillip for our recent investment here, which was initially made based on recovery potential for air traffic from 55-60% capacity utilization (having been down 94% in May), with a relatively high proportion of domestic traffic, and also a consumer spending recovery driving higher revenue per passenger. Airports generally have strong ‘moats’, which provide them with pricing power and attractive returns on capital, but in Mexico there is the added advantage in a recovery scenario of a ‘dual-till’ regulatory framework, which provides a set rate of return on aerospace revenues, but places no limits on the income generated from faster growing, higher margin non-aerospace revenues.

Another investment with local monopoly characteristics which benefits from a more positive economic outlook is Bolsa Mexicana de Valores (BMV), which operates the Mexican stock exchange, and is the second largest cash equities and derivatives exchange operator in Latin America. It has a diversified, vertically integrated business model with high cash flow generation, split between more stable fee income of 63% and more volatile trading revenues of 37%. We expect revenue growth to be driven by a combination of structural factors over the long term, such as growth of post-trade and market data businesses (as we’ve seen with other exchange groups globally), with a short-term support from cyclical factors such as a recovery in listing fees for equity IPOs. We were able to buy our position at a ~7% yield of what we see as sustainable free cash flow (FCF) (covering a 5% dividend yield). The 30% discount to international peers – with Brazilian peer B3 offering half the FCF yield – offers a glimpse of where it could re-rate with a tailwind.

Our final investment, Macquarie Mexico Real Estate Management (FIBRA Macquarie) is a real estate investment trust with investments across industrial (83%) and retail (17%). It has robust rental streams: revenue is mostly in US dollars, rental agreements are inflation adjusted, and they have 90%+ occupancy. FIBRA Macquarie proved its resilience during Q2, the quarter most negatively impacted by COVID-19, (with amongst the lowest rent relief in the industry (less than 3% of revenues) while maintaining a high annualized cash distribution rate to shareholders (8% yield). While the ~8% dividend yield is an important attraction, its position at the heart of the Mexican infrastructure that supports the export economy should also allow attractive levels of capital growth over the intermediate term. (As a guide, it has grown intrinsic value¹ at 11% CAGR since IPO). We believe USMCA consolidates Mexico’s competitive export status in the North American market which, combined with COVID-accelerated trends such as near-shoring, safety stock inventory (rather than pure ‘just in time’) and e-commerce penetration, should ensure a supportive environment for industrial warehouse demand.

Mexico offers an exciting new emerging market allocation within our portfolio. We are invested in three companies which give us good exposure to a domestic economic recovery, catalyzed by expansionary fiscal policy in the US, and which have attractive economics and barriers to entry. What’s more, we’ve been able to access entry points at valuations which we think reflect the past more than the future and the underlying strength of the franchises despite evidence of conditions improving.

¹Defined here as a book value per share plus dividend per share growth.


This document has been prepared by River and Mercantile Asset Management LLP (“River and Mercantile”) a London based investment adviser registered with the U.S. Securities and Exchange Commission under the Investment Advisers Act of 1940, as amended. River and Mercantile is also authorized and regulated by the UK Financial Conduct Authority. This document comprises the written materials regarding the provision of investment advisory services in separately managed accounts (SMAs), CITs and LLCs.
River and Mercantile Asset Management LLP is a subsidiary of River and Mercantile Group Plc which is registered in England and Wales under Company No. 04035248, with its registered office at, 30 Coleman Street, London WC2N 5HR.
River and Mercantile’s services are being offered only to U.S. entities which are “accredited investors,” or “qualified clients,” as defined in various U.S. laws and which have experience in financial and business matters, have sufficient available assets, and can understand and bear the investment risks applicable to River and Mercantile’s investment services.
Some of the investments offered within the SMA’s have not been, and will not be, registered under the U.S. Securities Act of 1933, as amended (the “Securities Act”) or any securities laws of any state of the United States. Such investments are being offered pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act.
The contents of this document have not been verified, are not comprehensive and do not constitute a due diligence review and should not be construed as such. No undertaking, representation, warranty or other assurance, express or implied, is made or given by or on behalf of River and Mercantile or any of its directors, officers, partners, employees, agents or advisers or any other person as to the accuracy, completeness or fairness of the information or opinions contained in this document and no responsibility or liability is accepted by any of them for any such information or opinions or in respect of any omission, and this document is distributed expressly on the basis that it shall not give rise to any liability or obligation if, for whatever reason, any of its contents are or become inaccurate, incomplete or misleading and neither River and Mercantile nor any such persons undertakes any obligation to provide the recipient with access to additional information or to correct any inaccuracies herein which may become apparent. Notwithstanding the aforesaid, nothing in this paragraph shall exclude liability for any undertaking, representation, warranty or other assurance made fraudulently.
Source: MSCI. Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI’s express written consent.
Although River and Mercantile Asset Management LLP’s information providers, including without limitation, MSCI ESG Research LLC and its affiliates (the "ESG Parties''),obtain information from sources they consider reliable, none of the ESG Parties warrants or guarantees the originality, accuracy and/or completeness of any data herein. None of the ESG Parties makes any express or implied warranties of any kind, and the ESG Parties hereby expressly disclaim all warranties of merchantability and fitness for a particular purpose, with respect to any data herein. None of the ESG Parties shall have any liability for any errors or omissions in connection with any data herein. Further, without limiting any of the foregoing, in no event shall any of the ESG Parties have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.

Latest perspectives

Monthly macro update – September 2021

Monthly macro update – September ...

Article October 8, 2021

Article October 6, 2021 Monthly macro update – September 2021 Written by River and Mercantile…

4 min read

Alternatives to traditional pension de-risking

Alternatives to traditional pension de-risking

Article October 8, 2021

Article October 8, 2021 Alternatives to traditional pension de-risking Written by River and Mercantile Share…

3 min read

US pension briefing – September 2021

US pension briefing – September ...

Article October 6, 2021

Article October 6, 2021 US pension briefing – September 2021 Written by River and Mercantile…

3 min read

Pension plan annuity purchase update – Q2 2021

Pension plan annuity purchase update ...

Article October 1, 2021

Pension buyout sales totaled $13.7 billion in Q4 2020, which represents the highest quarterly sales…

2 min read

Stay ahead of the curve by receiving our newsletter containing current industry developments and insights.