Mexico: basking in the sun

Mexico City: a dazzling megalopolis with an array of plazas, museums, cantinas, architecture, nightlife….the list is endless.

Our trip, however, had an important theme, and it was one that didn’t involve merely soaking up the culture and history (not to mention the delicious Mexican street food). Instead, ‘nearshoring’ – when U.S. companies move production closer to their bases and consumers – is gaining momentum, and Mexico is positioned at the forefront of this trend, as a result of China-U.S. geopolitical tensions.

From Mexico City, we undertook a ‘nearshoring visit’ to Monterrey, one of the main industrial hubs in northern Mexico. Here we visited business parks, and were left with a strong sense that demand for industrial real estate is thriving. Vacancy rates are almost non-existent, and a lot of new manufacturing space is leased out before construction is even finished.

However, while the narrative around Mexico as a nearshoring neighbour looks positive, the country needs to build electricity and water infrastructure to meet growing manufacturing demand and must also lessen its reliance on fossil fuels. Future policy alignment with investment in electricity generation will be key in order to take full advantage of this extraordinary opportunity.

Politics is also a talking point at present, with the next presidential election set to be held in summer 2024. The current president, Andrés Manuel López Obrador (“AMLO”) is set to stand down, on the basis that constitutional laws set a limit on a single six-year term. With two female candidates (of both the incumbent and leading opposition parties) as front-runners, Mexico will almost certainly choose between two women for president – a pivotal moment in its history.

During our trip, we met with large companies like Alfa and FEMSA that are in the process of simplifying their group structures, improving transparency, and focusing on core business strengths. We also saw that certain Mexican ‘fibras’, the term for some of the country’s leading real estate companies, have started thinking about reforming their fee structures, which would be an encouraging signal for corporate governance.

It is clear that Mexico is an attractive long-term investment destination. And in spite of the positive outlook, the market valuations look fairly cheap in a historical context. Shorter-term risks exist, such as potentially increasing political interference in markets ahead of the election, as well as the possible spillover effect if we see a U.S. recession. However, we are enthusiastic about the future for the Mexican companies that we own across our portfolios.