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Swiss award winner: how to play Mexican economic expansion

Swiss award winner: how to play Mexican economic expansion

This article originally appeared in the June 2017 edition of Citywire Switzerland magazine.

In the past year emerging market debt has become a key component of Charles Zerah’s Carmignac Pfl Global Bond fund.

The Citywire + rated fund manager says EMD still offers attractive opportunities that are supported by Chinese macro stabilisation, the commodity price rebound, improving current account balances in some emerging countries, and increasingly attractive yields in comparison to developed countries.

One of the biggest positions in the fund is Mexico, which is recovering after a few quarters from pessimism following the US presidential election.

Zerah says the aggressive tone of the election campaign has since been replaced by economic pragmatism, resulting in appreciation of the Mexican peso by close to 15% against the dollar since the beginning of the year.

‘Moreover, while the North American Free Trade Agreement (Nafta) stands a good chance of being tweaked, the kind of no-holds-barred fight that could do major damage to Mexico’s economy and exports now appears a much less likely prospect.’

Zerah says economic expansion in the country is supported by real GDP growth of 2.8% year-on-year, while the trade deficit continues to narrow despite US policy-driven uncertainty and a spike in inflation.

‘Mexico’s central bank continues to be vigilant about inflation and quite orthodox. It started a monetary tightening cycle in late 2015 and has since hiked rates nine times. This proves that keeping inflation expectations anchored is its most important objective.’

As a result Zerah maintains a cautious yet optimistic view on Mexico, and invests in Mexican rates that offer attractive valuations.

Zerah is exposed to Mexico through nominal (MEXICO 7.50% 03/06/2027) and real (MEXICO I/L 4.00% 08/11/2046) rates as economic activity remains strong and inflation is still increasing, reaching 6.2% in May. He also invests in corporate debt, holding PETROLEOS MEXICANOS 6.50% 13/03/2027 and PETROLEOS MEXICANOS 6.75% 21/09/2047.

‘That said, we expect volatility to increase with next year’s presidential election influencing the outlook for future reform efforts.’

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