A Mexico Opportunity May Be Emerging
Attractive opportunities often arise when investor perceptions fail to keep pace with reality--as appears to be happening these days with Mexican bonds and the funds that hold them.
For years, hyperinflation, a rapidly eroding currency, xenophobic curbs on foreign investors and other hurdles made Mexico a bondholder’s nightmare.
But a lot has happened since President Carlos Salinas de Gortari and his free-market pals took control in the late 1980s, and a number of global fund managers are now talking enthusiastically about the country’s fixed-income market.
“I’m making a very strong bet on Mexico--about as far as I’d go in any single country,” says Rob Citrone, manager of Fidelity’s New Markets Income Fund.
The brand-new portfolio, which premiered in early May, has 50% of its holdings in Mexican debt, with the balance spread among other emerging bond markets in Latin America, Asia, Europe and Africa.
Mexico should still be viewed as a fairly risky place where most fixed-income investors wouldn’t want to commit more than a fraction of their assets.
But because a lot of people haven’t fully grasped the reforms brought about by Salinas, Mexico’s bond market offers a combination of handsome yields and good appreciation potential relative to the risks present, Citrone and others say.
“There are a lot of inefficiencies in the market right now, and I think they will continue for at least another three years,” says Citrone.
Those inefficiencies have created some tantalizing yields of up to 17% or so on some peso-denominated corporate bonds, he adds. Assuming Mexico’s currency depreciates about 3% a year, as Citrone predicts, that would still represent a double-digit total return to Americans.
Another and larger segment of the market is made up of so-called Mexican government Brady bonds.
These securities, denominated in dollars and guaranteed by Washington, are offering yields in the 9.5% to 10.25% range without currency risk, says Isabel Saltzman, manager of the Latin America Dollar Income Fund from Scudder, Stevens & Clark.
The bonds are named after former Treasury Secretary Nicholas Brady and were created to help U.S. banks ease out of troubled Latin American loans by developing a market for the debt.
Brady bonds represent the largest and most liquid part of Mexico’s debt market, as well as those of several other Latin American countries, Saltzman says.
On average, the Mexican Brady bonds posted a total return of 12.4% last year, and were up 5.5% during the first four months of 1993, according to the emerging-markets bond division of J.P. Morgan & Co.
Saltzman likes both Brady bonds and Mexican corporate debt, along with Mexico’s Treasury bill equivalents, known as Cetes, which currently yield about 15%. This explains why she has placed a combined 33% of her fund’s assets in Mexico, the largest exposure by country.
What has created enthusiasm for Mexico’s bond market is a series of reforms under Salinas. A large number of government-owned companies have been privatized, Mexico’s investment markets have been opened up to foreigners, and the proposed North American Free Trade Agreement promises a boom in trade with the United States and Canada.
Many analysts believe trade will continue to grow whether or not NAFTA is ratified in Washington. Also, real economic growth in Mexico has averaged a respectable 3.5% annually over the last four years, while inflation has plunged from 159% in 1987 to 12% last year and a projected 7% to 8% in 1993.
The nation’s public debt has dropped from 76% of gross domestic product in 1987 to 36% last year, and the resulting sharp reduction in interest expenses has allowed the government to spend more on social programs, adding support to its policies.
“They’re doing to their budget deficit what we’ve only been talking about doing,” says William B. McKee of W.B. McKee Securities, a Phoenix brokerage that offers individual Cetes through the resale market.
For investors seeking professional management, diversification and other features, a handful of open-end funds have taken reasonably large stakes in Mexico’s bond markets.
In addition to Fidelity’s New Markets Income Fund (no load, 800-544-8888) and its 50% Mexican weighting, the TCW/DW North American Government Income Trust (no load, 800-869-3863) has a 25% stake, and the Alliance North American Government Income Trust (3% load, 800-221-5672) holds a 40% position.
The Alliance fund, the oldest of this small group, is up about 12%, including interest, since its premiere in March, 1992.
Closed-end bond funds with relatively big Mexican stakes include the Latin America Dollar Income Fund and Strategic Global Income, both of which trade on the New York Stock Exchange.
Whether you choose the closed- or open-end format, you will get diversification, professional management and other benefits that are especially important for anyone venturing into emerging foreign bond markets.
Currency risks, interest rate dangers and other uncertainties are still very much present in Mexico’s bond market, even if they aren’t as severe as they once were.
Mexico, Then and Now An improving economic situation in Mexico over the last several years has boosted interest in Mexican bonds and the mutual funds that hold them. Real economic growth 1987: 1.8% 1992: 2.6% Inflation 1987: 159% 1992: 12% Short-term interest rates 1987: 96% 1992: 16% Public debt as % of GDP 1987: 76% 1992: 36% Direct foreign investment 1987: $2.6 billion 1992: $5.3 billion Foreign reserves 1987: $13 billion 1992: $18.6 billion Source: W.B. McKee Securities
