Emerging Markets Spotlight: Mexico on the Move, Pt.1

Emerging Markets Spotlight: Mexico on the Move, Pt.1

Elle Wu:          I’m Elle Wu, a Client Portfolio Manager here at Thornburg Investment Management.  On today’s AM Spotlight, Portfolio Manager, Josh Rubin and I will be discussing our neighbor to the south, Mexico.  So, Josh, there’s been a lot of excitement around Mexico, which is a country I know that you are personally bullish on.  Can you walk us through what you’re excited about there?

Josh Rubin:     Absolutely.  You know first, I’m always most excited about New Mexico, but Mexico is very exciting right now also.  What’s interesting though is they’re not exciting because much has changed, they’re just exciting because people are aware of a lot of long-running strengths in the Mexican economy that are really becoming apparent today.  So, Mexican manufacturing has been very strong and important to the United States.  A lot of people associate it just with the auto-supply chain, but it’s actually always been much broader than that, electronics, aerospace and light manufacturing, have continued to grow in Mexico for the last decade, but other important things happening for Mexico right now.  The budget does have a lot of dependence on oil prices, so rising oil prices is a strength for Mexico, and debt to GDP in Mexico is only about 50 percent.  So, while we think about the United States budget debates or other, uh, countries around the world where maybe they have too much debt, Mexico has been very disciplined for a very long time, in managing its finances.  So, Mexico really has a foundation from a, both a manufacturing standpoint and a fiscal standpoint, to invest in its growth going forward.  And with the rebalancing of trade routes around the world, we are seeing this mix of United States companies, European companies and even Chinese companies who have a lot of interest in doing more business in Mexico; sometimes for the domestic economy and sometimes for export.

Elle Wu:          And we’ve actually saw headlines over this year about Mexico overtaking China as the United States largest trading partner.  Can you share some thoughts around that as well?

Josh Rubin:     Uh, absolutely and, and that’s, uh, what has happened.  China was contributing close to 20 percent of the United States imports.  Today that’s down below 15 percent, and Mexico has been rising towards the 15 percent level, so we actually do reach that point of Mexico being more important than China, uh, this year in 2023.  As I just mentioned, it is broad-based and a lot of it is back-and-forth trades.  So, it’s not simply that everything has to happen in Mexico, it is treating Mexico as a real part of the North American Supply Chain in the same way we integrated Canada, uh, but today, both the cost structure of Mexican labor, general logistics, as well as the quality of Mexican manufacturing, make it really worthwhile to be adding manufacturing capacity in Mexico.  That there are some big names that are building facilities, semiconductor companies from Asia or electric-vehicle companies, but a lot of it is just sort of small nuts and bolts, blocking-and-tackling additions of manufacturing capacity across all parts of Mexico.

Elle Wu:          So, it kind of sounds like a sure thing, but as we know, nothing is linear.  Do you have any concerns?  Where do you see Mexico going in, like, 5 years, 10 years from here?

Josh Rubin:     Sure, you know I think catchy things are always popular, and people are talking about Mexico’s moment.

Josh Rubin:     The truth is, uh, people also used Mexico’s moment a little over 10 years ago, when they were using Mexico’s moment when NAFTA was first signed.  So, I think it’s hard to say this is a sure thing but what’s more important is, the Mexican economy has just been consistently resilient for a very long time, and Mexico does have a large population that can continue to deepen its skills-base.  So, even if there are a couple of fits and starts, um, I, I think Mexico really can navigate the environment; however, it really does appear that some of the geopolitical angles leading companies to wanna rebalance their supply chains, is not going to reverse anytime soon.  You know, we talk to a lot of industrial real-estate companies across Mexico, and we see things like them having 3 to 5 years of visibility into both demand for more property, uh, leases that are getting extended well in advance of, of the actual expiration of the lease, and people wanting to sign 10-year leases.  So, it really feels like this degree of near-shoring activity is not just sort of here for the short term but has a, has some real likes to it.

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