Reforms in Mexico are moving along swimmingly, a recent observation from Bridgewater Associates reveals. While financially sound southern nation with a generally low debt overhang on top of economic growth appears to have a long runway, various issues addressed in whispers in Mexico, its criminal control problem and the lack of central bank non-traditional economic stimulus, are also issues the Bridgewater report avoided.
Criminal influence of Mexico's judicial, political and press institutions not addressed in Bridgewater report on advancing reforms
The inside story that was discussed in 2013 and 2014 regarding Mexico was the influence inside Mexico’s judicial and political system by criminal cartels. In certain regions, people took matters into their own hands and rebelled against criminal gangs that gained control over the levers of power in society. The fight for the rule of law was apparently taken on at a higher level, as those rebelling were given assurances that appropriate steps would be taken to ensure some semblance of political order.
The judicial and political control also extends to practical restrictions on freedom of the press in Mexico. There is no government ban on press freedoms, per say, but rather the very practical potential to find a bullet in one’s head – or worse – could befall the fate of a reporter who questions what is sometimes considered a criminally controlled establishment.
What has happened in the wake of an apparent accommodation with the economic forces at odds with the U.S. drug war has been a Mexican economic machine that appears to be operating at peak efficiency after a history of falling behind to emerging market leader China. This, not the decidedly uncertain judicial environment or central bank economic magic in Mexico, was the topic of a recent Bridgewater Associates piece on Mexico making “steady progress” regarding reforms.
Bridgewater sees an economy free of a debt leash with a long runway ahead, observes key correlation mis-match
While China has seen a boom in its stock market recently, it is Mexico that could be the economic power house. Unlike China, Mexico’s debt overhang is positive, labor costs have been contained and, having benefited from a lower currency – a key component in the economic development of a struggling sovereign – make Mexico a strong investment on several levels.
In fact, moving money out of the potentially overheated Chinese stock market and into a generally subdued Mexican assets might be a strong relative value play. Bridgewater did not make investment recommendations in the piece, but rather noted the economic landscape. Considered to be operating among the top relative value strategies in the hedge fund world, they didn’t let the opportunity escape their preview. In particular, the report, authored by Bridgewater’s Co-CEO Greg Jensen, Senior Investment Associate Whitney Baker and Investment Associate Sinan Ilter, looked at a key, if little discussed, correlation point that much of the market apparently misses.
While many market players look at Brazil’s economic situation and consider Mexico a tag-along trade – assuming that similar commodity performance drivers are at work – Bridgewater takes this analysis apart and potentially points to the mis-pricing of assets. It is this commodity exposure where the analysis shines a light, noting that Mexico is a “less capital-reliant” economy and that the markets are sending this message through various relative value price divergences.
Bridgewater analysts note relative value price disparity, avoid discussion of Mexico's light touch central bank central planning
The Mexican peso, and related domestic interest rates, are one such example the Bridgewater report cites. The primary difference can be seen in inflation targets, which Mexico is hitting and the rest of Latin America is missing. Another point of consideration is the difference between “potential growth” and actual growth. In this regard Mexico is doing what amounts to a professional athlete following up a large contract with stellar performance: Mexico is delivering on its potential. A recent Bloomberg report also noted the economic deliverance, citing Mexico’s strong gross domestic product growth. Bill Adams, an economist at PNC Financial Services Group Inc (NYSE:PNC), was quoted as expecting a rate hike from the Bank of Mexico “likely in the summer months.” And this rate hike is based mostly on economic fundamentals, as the quantitative easing rifle shot to benefit high end assets has not been fired in Mexico as it has been in China and around the balance of the “developed” world. In other words, the potential for an asset bubble to burst might not be as likely.
While the Bridgewater report didn’t touch on the relatively mild touch the Mexican central bank has applied to its somewhat free markets, it is the lack of non-traditional economic stimulus, a relatively debt free economy, cost effective electrical supply, a liberalization of state run monopolistic enterprises, a simplification of laws – particularly in regards to labor, tax and financial reform – that have laid the foundation for success.
What is unclear at this point is how much economic and political success can be achieved without accompanying freedom of the press or a rule of law that is unafraid to confront violent criminal organizations. This was decidedly not considered in the report and, one would imagine, might not be the subject of a Bridgewater conversation in the future unless it impedes the corporate economic growth in the region.
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