Sweet spot in Mexico earns second look from investors

Published 08 March 11 01:20 PM

By Patrick Rucker

(Reuters) - Mexico's improving economic prospects, coupled with low inflation, are winning the country a second look from international investors and fund managers.

Investors see potential in Mexico's services sector and in enticing more companies to market, and are also bullish about new financial tools which could send billions of dollars into infrastructure and private equity deals.

Expected economic growth of about 4 percent this year, combined with inflation of about 3.5 percent, compares well to regional peers, many of which are tightening monetary policy to fend off surging prices.

"In our view, the Mexican economy is very much in a sweet spot," Lupin Rahman, senior vice president of emerging markets portfolio management at bond giant Pimco, told a LatinFinance summit this week.

"In terms of output, in terms of growth, in terms of inflation, all these dynamics point to a very positive 2011 for the Mexican economy."

Mexico's apparent comeback in the sentiment stakes follows several years in the shadow of Brazil, which weathered the global crisis better but is now wrestling with high inflation.

Emerging market investors surveyed by Bank of America Merrill Lynch in February put Brazil at underweight for the first time in the survey's history, while preferences for Mexico are increasing.

But Mexico still has some homework to do.

The economy depends heavily on manufacturing exports to the United States, and while the recovery in U.S. consumer demand has prompted economists to lift forecasts for Mexican growth, investors also look for diversification and for structural reforms.

"If Mexico can turn the engines and start opening its service sectors it will be a fantastic run for the economy," said Alfredo Thorne, head of global markets at Banorte bank.

"It can seriously not only grow at 6, 7 percent but actually perform much better than the BRICs." Brazil's growth is expected to slow in 2011 to 4.5 percent, according to the International Monetary Fund.

Thorne estimates Mexico's drugs war, which has killed more than 34,000 people in the last four years, is cutting 1-2 percentage points from annual growth, but says it will be worth it. "If Mexico manages to win this war, it will be the most important structural reform," he said at the summit.

Luis Harvey, co-founder of private equity firm Nexxus Capital, said Mexico's service sector was underrated.

"You have a huge internal market which has a per-capita income twice as big as Brazil's," he said.

Leisure, health and consumer finance are some of the industries getting a lift from the expanding middle class and sectors where Harvey has put money to work.

Buyout firms typically drive their acquisitions toward a public offering and the Mexican exchange has room to grow with $550 million of shares swapping hands daily compared to the roughly $3.6 billion traded daily in Brazilian stock markets.

"You need to get more companies going to the market; more people investing in equities," said Harvey.


New financial instruments are also helping improve Mexico's reputation among global investors, after bureaucratic hurdles and inertia caused many to lose patience.

Brazil buyout firm GP Investments (GPIV11.SA), for one, opened a Mexico City office four years ago intending to make a splash in Latin America's second-largest economy, but pulled out. Partners remember the attempt as a costly mistake.

Carlyle Group CYL.UL also retreated, leaving behind one money manager who has spent much of the last two years in a time-consuming effort to draw Mexico pension fund investment. Now he is finally starting to see results.

Mexico is rolling out new investment options, such as real estate investment trusts (REITs) and a hybrid security designed solely to serve the country's retirement funds.

Those Mexican pension funds, which sit on 1.4 trillion pesos ($116.5 billion) in assets, are expected to drop sizable investments into REITs. Joaquin Avila, the Carlyle veteran, expects his EMX Capital will soon win pension fund financing.

"It has been a tremendous amount of work. To some extent cumbersome and to some extent understandable," said Avila. "These are new securities to Mexico."

Local money managers say the new securities will bring welcome efficiency and competition to Mexican markets.

"Now we are seeing real sophistication in the financial marketplace," said Juan Alberto Leautaud, a local real estate money manager whose infrastructure investment plan recently won $220 million in pension fund cash.

New financing has drawn money managers like Paul Ahlstrom, who brought his wife and six kids to Monterrey in Mexico's north as he made a private equity pitch to the funds.

It took nearly two years, but Ahlstrom says a deal is near with his Alta Growth Capital that will blend pension cash with $75 million of outside capital.

"This deal will happen. It's just painful to be a pioneer," he said. "I hope we don't become the pioneer with arrows in his back."

(Additional reporting by Guillermo Parra-Bernal in Sao Paolo, Editing by Chizu Nomiyama)


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