Why Mexico is reliable for investors, despite Trump

Among Mexicans, few get as much pleasure from US President Trump’s tough talk excoriating our southern neighbour as Gerardo Rodriguez, portfolio manager of BlackRock’s Total Emerging Markets Fund.  

Since January, Total has been seriously overweighting Mexican bonds, and the president’s rhetoric and tweets about “bad hombres”, building walls and dealing NAFTA a death blow tend to send the peso falling. In January, during Trump’s first days in office, the peso’s exchange rate with the US dollar peaked at nearly 22, its weakest level in history.

For Rodriguez, that moment was somewhat like the S&P 500 low in March 2009, after the financial crisis. Rodriguez knew it was a great time to buy Mexico, and he instructed BlackRock traders to pile into peso-denominated bonds when most investors were running for cover. At the time, Mexican government bonds were yielding 7.8 percent, compared with 2.3 percent for ten-year US Treasurys. This move, plus a big allocation to beaten-down Asian stocks like Samsung and Ali­baba, has helped Total Emerging Markets achieve a 10.4 percent total return year to date and a 4.2 percent three-year average annual return, topping its category and earning it five stars among Morningstar-rated funds.

“All of our analysis was flashing red hot in favour of Mexico in January. Trump’s aggressiveness didn’t frighten us away. When there’s a big move like that in Mexico, you go in,” Rodriguez says from his office on Park Avenue in New York. Rodriguez just returned from 90-degree weather in Mexico City, but New York on this day was an unseasonable 55.

“You have a window. It’s now until the end of the year. After that, things will start to intensify, and you will need to reassess. There will be new themes because of [domestic] politics,” Rodriguez says, adding that populism in Latin America, recently dormant, could be awakened given that the ex-governor of Mexico City, Andrés Manuel Lopez Obrador, a populist, is leading in the polls for next year’s election.

According to Rodriguez, Mexico has been through far worse than Trump. “He’s not really at the top of our minds. Security, corruption and the economy are far more important,” he says.

Rodriguez begins to run down a list of things that make Mexico reliable for investors: Chiefly, its proximity to the US, its welcoming stance on manufacturing and trade, and relatively conservative fiscal and monetary policies. The takeaway: Mexican politics is turbulent, but economic policy is not. In January, hundreds of Mexicans took to the streets to protest gasoline price hikes. He describes the scene of looted shops, busted windows and protesters calling for President Enrique Peña Nieto’s resignation. Mexico’s president is less popular than Trump, so the government can’t avoid political stress. But it will seek to avoid financial stress, Rodriguez insists.

He ought to know. He has insider status when it comes to Mexico’s finances. Born in Puebla, a state with a 64 percent poverty rate, Rodriguez, 44, is the son of a construction entrepreneur and attended Universidad de las Américas in Puebla, majoring in economics and playing shooting guard for the college’s championship team, the Aztecas. Rodriguez went straight from there to an entry-level position at Mexico’s ministry of finance and then on to Stanford, earning a master’s degree in engineering, economic systems and operations research.

After graduating in 1999, Rodriguez headed back to the finance ministry under presidents Vicente Fox and Felipe Calderón, ultimately rising to under-secretary of finance. During his 14-year tenure there, Rodriguez got to know the Mexican capital markets intimately. From 2005 to 2011, as head of Mexico’s public-debt management, he was the nation’s yield-curve czar. He also created an online Treasury Direct platform similar to the one in the US and launched a National Infrastructure Fund.

“I was in the finance ministry during the Asian Tiger crisis, at a time when we were just getting over the Tequila Crisis… and then, bam, it’s 2008,” Rodriguez recalls. The Tequila Crisis refers to Mexico’s devaluation of its peso in December 1994, which sparked hyper-inflation and capital flight. At the time, Mexico faced default on its dollar debts, and the IMF, with the help of the US Treasury, spent $40 billion bailing out the country.

“We became the poster child of the IMF,” he says. “None of that compared to 2008.” That’s when the world began falling apart. In Mexico City, while Wall Street was imploding, Rodriguez and others in the finance ministry were looking at their balance sheets for ticking time bombs, “and we found nothing,” he says. Until Rodriguez realised that Mexican corporations had gorged on dollar loans. Companies needed more pesos to pay dollar debts. It was the Great Recession with a painful reminder of the peso crisis.

“We spent $25 billion to stabilise the situation, because we thought, ‘No way is anyone going to fund us’. It was intense,” he says.

Thanks to Mexico’s good record paying back its 1990s peso-crisis debts, it got thrown another IMF lifeline during the 2009 G20 meeting in London. “We got a $47 billion credit line. Until then, we thought we were entering another major financial crisis,” he says. On the news, the peso rebounded from 15 to the dollar to about 13.

According to Rodriguez, the peso strengthens fast on good news. He predicts it will happen again.

In 2013, Rodriguez was recruited by BlackRock, barely a year after he spearheaded the hosting of the G20 Summit in Mexico City. During the meeting, Rodriguez led the effort to increase IMF funding by over $450 billion. Despite his decision to move El Norte, Rodriguez continues to be named as a potential successor to Agustín Carstens, the current governor of Mexico’s central bank.

In his new role managing BlackRock’s $370 million fund, Rodriguez has spread its investments around the globe, employing something of a contrarian value strategy. The fund currently has its largest exposure to equities in China and Taiwan and is overweight tech and telecom stocks. From a currency standpoint, he is long the Brazilian real as well as the Thai baht and Turkish lira. For bonds, his top three holdings are Mexico, South Africa and Indonesia, all yielding around 7 percent. Total is leveraged 140 percent on the fixed-income side to help limit volatility in equities. In 2016, the fund returned 13.2 percent, beating the benchmarks and its category average of 8.47 percent.

In December, Fitch downgraded Mexico’s credit outlook from stable to negative amid an interest rate hike by its central bank. The peso has recently strengthened to 18.80.  

 “The big mystery for Mexico has been Trump, but soon local politics will take centre stage,” he says. “But there is a strong fundamental backdrop in the country.” What if its populist frontrunner comes to power and the peso falls back to 22?  Says Rodriguez, “Buy. Absolutely buy.”