Scott Piper, Potfolio Manager of the Milltrust Latin America Fund, shares his outlook for Mexico

DATE: 15 Aug 2013

The short-term outlook for Mexico remains about a cyclical recovery from the soft patch the economy experienced in the first part of 2013. This soft patch was caused by:

  1. a slowdown in industrial spending related to weak industrial production in the U.S. (manufacturing exports excluding autos have been sluggish);
  2. the collapse in government spending (both investment and consumption) in the first half of 2013;
  3. the crisis that has beset homebuilders specializing in the low- income segment (which lowered GDP by some 30 bps, in addition to its indirect effects on consumption and employment); and
  4. delays in investment decisions as a result of pending energy and fiscal reforms.

Overall, the business community has a positive perception of the reforms, but reforms always create uncertainty. We believe that all of these factors (except for the homebuilders? troubles) will improve significantly in the second half of 2013 and into 2014. Infrastructure spending in 2014 and beyond will likely pick up the slack (and more) left by the slowdown in home construction.

In the medium term (starting in 2014), the outlook is about the reforms. We are confident that we will see meaningful fiscal and energy reforms in the second half of this year. Fiscal reforms will be focused on broadening the tax base (i.e., collecting more from the informal sector), although we cannot rule out an increase in statutory tax rates, particularly for high-income individuals. Specifically, we expect the elimination of special tax regimes (e.g., VAT exemptions for food and medicines, except for a very small basket of common items; differential tax rates at the border; corporate tax loopholes; gas subsidies). The government intends not to hoard these newly gathered resources but to spend them on infrastructure and social programs.

With regard to energy reform, the PAN party has already presented a sweeping proposal which includes constitutional changes and the possibility of granting concessions for oil and gas exploration. Petrochemicals and transportation are two sectors that will likely be made significantly more open, and these reforms would not require constitutional changes. We are also awaiting secondary legislation that will give us more visibility on TMT and financial reform. In the meantime, we are reducing our holdings of consumer stocks and increasing our exposure to industrials and other stocks leveraged to infrastructure spending.