Mexico's corporate sector has made a lot of money from exports to and cheap imports from the U.S. in the 23 years since passage of the North American Free Trade Agreement. President Donald Trump's demand to rewrite NAFTA, Mexico's promise to increase fees on U.S. goods in retaliation for Trump tariffs, and the expected election of big-government populist Angel Manuel Lopez Obrador to Mexico's presidency in voting July 1, spooked investors at a Latin America investment conference last week. sponsored by BlackRock's iShares funds group.
"The next two months will be very important," with the Mexican election, and practical deadlines for President Trump's efforts to update or replace NAFTA, said Tina Byles Williams, chief executive and chief investment officer at Philadelphia-based FIS Group, which manages about $10 billion in global stocks and bonds.
If a NAFTA deal isn't settled by early August, "I think the president will abrogate NAFTA and attempt to get bilateral (U.S.-Mexico and U.S.-Canada) trade deals," Byles Williams said. "You need the (current, pro-U.S. trade) Mexican Congress to ratify a deal if one is struck in that time frame. And then you have to have our Congress ratify such a deal by December, before (Lopez) Obrador begins office."
As Trump pointed out recently, most Mexican exports go north to the United States. But everywhere else in Latin America, "the so called de-gringo-ization" of exports, with development, financial and trade deals increasing between Latin American nations, China, Europe and Canada, "has been a trend for the past 25 years," Byles Williams said.
Now Mexico may finally feel obliged to diversify its exports, instead of relying so much on U.S. markets. Trump's moves would "tip us away from the U.S. as being the main player in Latin American trade, Byles Williams said. The bigger deals will come with China, she said.
Byles Williams Chinese President Xi Jinping will present the United States "as the big bad bully, kind of like what (Russian) President (Vladimir) Putin has done," to justify painful fiscal or economic reforms in his country as well as new pressures on its trading partners. That won't help U.S.-Latin American trade.
The Mexican currency, she said, could take a hit: "I think the peso has a lot further to fall." FIS also expects a weaker Brazilian real, and it has sold Brazilian small-cap exchange-traded funds to reduce exposure for Pennsylvania and other clients. Yet Brazil could benefit if U.S.-Mexico relations continue to deteriorate: "I don't know if it's a trade war yet, but Mexico is a clearer casualty." In contrast, "Brazil, Colombia, maybe Chile, are the brightest spots in Latin America."
"Bullish on Brazil, bearish on Mexico, neutral on Argentina," was an approach claimed by Patrick Jamin, chief investment officer at another investment group that tracks Latin America, NorthCoast Asset Management.
BlackRock staffers, include exchange-traded funds strategy chief Christopher Dhanraj, also posted a report reviewing the Mexican election in detail.
They noted that Lopez Obrador _ widely known by his initials �� is familiar to many Mexicans: he was mayor of Mexico City, one of the largest municipalities in the world, for the social-democratic Party of the Democratic Revolution. He now heads his own party, MORENA. The name is both an acronym for "National Regeneration Movement," and a word for a woman who is, like most Mexicans, of indigenous heritage or mixed race, unlike the nation's European- and Middle Eastern-descended business elite.
Lopez Obrador, BlackRock notes, "enjoys a sizable lead in the polls, and his victory is becoming most investors' base-case scenario." Rivals Ricardo Anaya, who represents an odd alliance of the conservative PAN (National Action) party and Lopez Obrador's old PRD, trails, and Jose Antonio Meade of the once-dominant PRI (Revolutionary Institutions) party, is running last.
What's less clear is whether MORENA will take control of the Mexican Congress to approve major constitutional changes, or will need to compromise with rival party factions. Mexico's economy has been "reasonably stable, with sound growth, healthy employment and lower inflation" _ and a falling birth rate that may reduce emigration pressures and force wages higher.
But BlackRock, which sponsored last week's conference, says investment in Mexico has lately declined, given the rising uncertainty over how hard Lopez Obrador will hit Mexican business with new taxes and restrictions _ plus Trump's tariffs. Mexican stocks have been dropping since May and are down nearly 10 percent in U.S. dollar terms (a little more than half as much in pesos.)
A Lopez Obrador victory "could lead to an increase in public investment, which could be beneficial in the short term," at least until inflation and interest rates start going up, BlackRock said. But that could be followed by a painful drop in export sales, increases in debt and interest rates, and continued decline in investment, which could stall Mexican economic growth, boosting social pressure along the U.S. border.
