Monthly perspective June 15, Some clouds clear

Transcription

1 Emerging Markets Institute Monthly perspective June 15, 2017 Some clouds clear SUMMARY Peso investments have been positive for the first 5 months of 2017, with strong peso appreciation vs. the US$, a reversal from Main reasons: positive prospects for NAFTA renegotiation, positive French elections, and PRI victory in the State of Mexico. Pro-growth policies in the US have helped, as well as positive growth in EM and Mexico. Foreseeable global risks: failure to execute pro-growth policies in US, problems in Europe with Brexit process and elections, geopolitical crises. Local risks: problems with NAFTA, presidential election outlook We change investment scenario probabilities: positive (30% probability, from 20%), negative (30%, from 40%), middle (40%, unchanged). Our weighting for long term peso portfolios: inflation-linked debt 60%, stocks 20%, Mexican REITs 10%, cash 10%. Behind every cloud is another cloud. Judy Garland Investments: first 5 months 2017 In 2017, to June 9, peso investments have been positive, a mirror of 2016 performance (Figure 1). Top asset class were Fibras (Mexican REITs), followed by stocks (the IPC index), emerging markets and Udibonos (Mexican Inflation Linked Securities - ILS). The most important difference was the US$, which after appreciating almost 20% vs. the peso in 2016, has depreciated by almost 12% in Main reasons were political (improvement in NAFTA prospects, positive French elections, and the PRI victory in governor s elections in the State of Mexico), and economic (better than expected GDP growth in the first quarter of 2017). Figure 1. Investments by asset class: performance Jan1-Jun9, 2017 vs (% pesos).source: Bloomberg, Franklin Templeton. FIBRAS IPC Udibonos Bonos M Acciones M. Emergentes MX Guber Cetes Acciones MD y ME Acciones M. Desarrollados ORO S&P UMS US TREASURIES Dólar WTI YTD

2 POLITICS So far in 2017, there has been good news for investors globally, with an improvement in investor confidence. Global US NAFTA On May 18, the Trump administration (through US Trade Representative Robert Lightizer) sent a letter to Congress announcing a renegotiation of NAFTA between Mexico, Canada and the USA. The important points of the letter were that the negotiation would be between the three countries and that it would be a modernization, soothing the fears aroused by Trump s campaign rhetoric that the US would scrap it. On June 6, Mexico and the US reached a revised agreement on sugar trade. The agreement maintains the same minimum export volumes of sugar to the US as those agreed in 2014, increasing them from 60 to 70%. Other key points are a) there are no compensatory tariffs on Mexican sugar exports to the US, and b) Mexico will be the first option for 100% of excess demand from the US. The agreement is a good omen for NAFTA renegotiation as it was positive for both sides, and was reached in a relatively short time Other US political issues In relation to Mexico, NAFTA news weighed more on investors than the issues (given blanket coverage by the media) of the investigation of the relations of hte Trump campaign with the Russians, inflamed by the dismissal of FBI Director James Comey and his Senate appearance on June 8, and Trump s withdrawal on June 1, from the Paris Accord on Climate Change. France On May 7, Emmanuel Macron, candidate of the center right party La République en Marche! (Republic on the March!), won the French presidential election on the second round, with a 66% majority. After the first round on June 11, there is a strong probability that his party will also win parliamentary elections in the second round on June 18 with a large majority. In general, this is good news for the world as it implies a rejection of populism and the antiglobalization wave. United Kingdom On June 8, Theresa May and the conservative party won the UK elections, with a much reduced majority, forcing them to seek a ruling coalition with the extreme right Northern Ireland Democratic Unionist Party. This will complicate not only the Brexit negotiations with the European Union (EU), but also internal UK politics. There are various possibilities: change of Prime Minister, new elections, a second Brexit referendum, even a dissolution of the UK. It also increase the possibility that the beginning of negotiations with the EU, scheduled for June 19, be postponed. However, it was already predictable that Brexit would be complicated and UK elections do not appear to have affected significantly Mexican investments. Mexico Elections Figure 2. State elections June 4, 2017: available official results. Source: Franklin Templeton In the June 4 state elections, the PRI won in the state of Mexico, avoiding a catastrophic defeat to Morena, the party of Andrés Manuel López Obrador (AMLO), and defending the state it has governed since the foundation of the PRI in Morena did not win any state, with the PRI narrowly winning Coahuila, and the PAN-PRD coalition winning Nayarit, and municipal elections in Veracruz. Official protests have been made by the runners-up in the states of Mexico and Coahuila (Figure 2). 2

3 Assuming that official results are not overturned, the elections offered hopeful signs for the 2018 presidential elections for each of the main parties: PRI retained first place in the state of Mexico and Coahuila and was in second place in the other 3 states. Morena achieved a major increase in its overall percentage of the vote, having been founded as recently as PAN, with victory in 2 states, reaffirmed its advance in the 2016 state elections. PRD, with a better than expected performance, showed it could compete with Morena on the left. It may not have to unite with Morena, keeping the left divided, and offering possibilities to other parties and coalitions. ECONOMICS Figure 3. GDP growth (%): consensus estimates for developed and emerging countries (9Jun17). Source: Bloomberg, Franklin Templeton Developed Emerging Growth(%) Growth(%) 2018 E 2017 E E 2017 E 2016 World World Developed Emerging US China Euro Area India Japan Rusia (0.50) Britain Brasil (3.50) Australia México Canada Corea del sur Germany Indonesia France Turquia In the Bloomberg global consensus, an improvement in economic growth is still forecast for 2017 over 2016 (Figure 3). Mexico is an exception owing to fears over the NAFTA renegotiations. In the consensus of Mexican analysts prepared by Banco de Mexico, GDP estimates have improved from 1.49% in January 2017 to 1.97% in May FORESEEABLE RISKS Global While some clouds have cleared, principally the NAFTA renegotiation and the State of Mexico, relevant global and Mexican risks remain: US: failure to execute pro-growth policies of the Trump administration (tax reduction, deregulation, infrastructure investment). North America: unexpected NAFTA renegotiation glitches. Europe: problems in the UK, the Brexit process, and other elections (Germany and Italy). Otros: Middle East, Russia, China, and Korea. Local Elections: problems with June 4 elections. Outlook for 2018 presidential elections. Security: drug-trafficking issue. Corruption: more cases at a federal and state level. SCENARIOS Putting together our analysis of global and Mexican politics and economics, we present three scenarios where the objective is Mexican economic growth. In the positive scenario, we assume that all foreseeable risks turn out favorable for Mexican growth, in the negative scenario that they turn out unfavorable, and in the middle case through a mixture of factors (by their nature, intensity or duration) they turn out to be mixed. Subsequently we offer probabilities for each scenario. 3

4 $ / USD Sub / Sobrevaluación Monthly perspective June 15, 2017 Positive In the US, a combination of tax reduction, deregulation and infrastructure Investment is implemented, increasing growth. NAFTA is renegotiated positively for all sides. Risks relating to Europe, China, Russia and Middle East do not materialize. In Mexico, electoral, security and corruption risks are contained. There are positive prospects for presidential elections in Negative Growth related policies are stalled in the US, and NAFTA renegotiation is frustrated in terms of content and timing. The UK and the EU disintegrate, and risks in China, Russian and the Middle East materialize. A severe recession ensues, with Mexico one of the most affected countries. Electoral, security and corruption problems increase, and the outlook is negative for 2018 presidential elections. Middle Growth measures are implemented partially in the US. NAFTA is renegotiated with mixed results. Risks in Europe, China, Russia and Middle East materialize partially. In Mexico, there are electoral, security and corruption problems, but they are contained. There is no clear prospect for 2018 elections. We currently assign the following probabilities to each scenario: positive (30%), negative (30%), middle (40%). MARKETS Scenarios are reflected in Investment markets: asset allocation, and the performance of each asset class. Asset allocation According to available Information the rotation, from debt to stocks and from cash to other assets, continues in the US (Figure 4). Figure 4. Asset allocation US Source: Franklin Templeton The peso In Mexico, the most important factor has been the valuation of the peso. In 2016, it was negatively influenced by the Trump election. In 2017, it was positively influenced by the change of tone in the Trump administration, and the PRI victory in the state of Mexico over Morena (Figure 5). Figure 5. Peso vs. US$: Jun2017. Source: Franklin Templeton % % % 0 40% % % -20% -23.% -40% -60% Mexican peso PPP theoretical value Under /over valuation 4

5 Jan/16 Feb/16 Mar/16 Apr/16 May/16 Jun/16 Jul/16 Aug/16 Sep/16 Oct/16 Nov/16 Dec/16 Jan/17 Feb/17 Mar/17 Apr/17 May/17 Jun/17 Monthly perspective June 15, 2017 Investments in US$ and pesos: comparative performance Despite the peso depreciation, it is relevant that, long term, investments in peso denominated instruments have performed better, on a risk reward basis, than US investments denominated in US$, in peso terms (Figure 6). Figure 6. Investments denominated in US$ and pesos: performance measured in pesos Jun17. Source: Franklin Templeton Debt The main factor affecting interest rates has been peso depreciation which has caused an increase in producer price inflation which in turn has passed through to consumer inflation (Figure 7). Figure 7. Consumer price inflation (INPC) and producer price inflation (INPP) may Source: INEGI, Franklin Templeton This has led to successive increases by Bank of Mexico of its reference rate (Figure 8). 8 Figure 8.Bank of Mexico: reference rate (Jan16-Jun17). Source: Banxico Tasa objetivo

6 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 YTM (%) Monthly perspective June 15, 2017 Rates over all terms have been affected, and their recent levelling reflects lower producer inflation (Figures 7 y 9). Figure 9.Nominal interest rates for different terms: Jun17. Source: PiP, Franklin Templeton Y 5y 10y 20y 30y This is also reflected in consensus 10 year interest rate forecasts for the end of 2017 (Figure 10). Figure 10. Developed and emerging markets: forecast 10 year rates for end-2017 (9Jun17). Source: Bloomberg, Franklin Templeton Developed Emerging local 10y yields (%) local 10y yields (%) 4Q17e Actual Aumento 4Q17e Actual Aumento (bps) (bps) US China (12) Euro Area India Japan Rusia 7.41 Britain Brasil Australia México Canada Corea del sur Germany Indonesia France Turquia Stocks Figure 11. Stock markets: 2016 (US$). Source: Bloomberg Figure 12. Stock markets: 2017 (9June - US$). Source: Bloomberg After its poor US$ performance in 2016, the Mexican stock market has been one of the best in 2017 (Figures 11 and 12). In pesos, it reached a historic peak on May 9, 2017, and is still close to those levels (Figure 13). Figure 13. Mexican stock market in pesos (IPC) 31Dec15-9Jun17. Source: Bloomberg 6

7 Estimated PE ratios are still relatively high (Figure 14). But the composition of the Mexican IPC index should be taken into account, as it does not include low multiple sectors (see Monthly Perspective May 2017). Figure 14. México: múltiplo estimado P/U comparado con otros países. Source: Bloomberg Mexican REITs (Fibras) Owing to their novelty, high dividends, and inherent inflation protection, Mexican REITs have performed better than stocks since inception in March 2011 (Figure 15). However, following the Trump election on November they had their biggest correction since 2013, owing to fears of a rejection of NAFTA by Trump, which affected many REITS related to the Mexico-US supply chain. With the change of prospects due to the announcement of a modernization of NAFTA, there has been a reversal in REIT prices. Figure 15. Fibras vs. Mexican stocks, including dividends Mar2011-9Jun17 (base 100 MXN$). Source: Bloomberg 7

8 At current prices, REITs still offer opportunities, especially to investors who seek high dividends and inflation protection (Figure 16). Figure 16. Fibras: valuation and dividends. Source: Franklin Templeton Conclusion So far in 2017 there have been positive surprises for investment markets. In line with our expected scenarios, and the performance YTD of different asset classes, our long term peso portfolios are currently weighted between: inflation linked securities 60%, stocks 20%, REITs 10%, cash 10%. Timothy Heyman Ramsé Gutiérrez Luis Gonzalí Jorge Marmolejo Nadia Montes de Oca June 15,

9 Main financial indicators: monthly and YTD performance (May 31, 2017) In May, in Mexico, the IPC share index fell 0.96%. Nominal rates rose over all terms except 30Y, and real rates were mixed. The US$ fell 1.42% vs. the peso. In the US, the DJ, S&P500 and Nasdaq rose. Nominal rates rose in the short term and fell in the medium and long terms. Real rates rose over all terms. According to Banxico business climate poll, optimism rose to 30% (21% previous), no change fell to 42% (55%), and pessimism rose to 27% (24%). Stock market and oil Mexico IPC 48, , % 6.89% 6.20% Local currency (USD/MXN) % -9.35% 19.53% Mexican oil mix (USD/bl) % -5.68% 69.16% Nominal rates CETES % 6.50% 22 bps 88 bps 279 bps CETES % 6.90% 37 bps 84 bps 277 bps M5 7.27% 7.05% 22 bps 6 bps 166 bps M % 7.19% 13 bps -18 bps 118 bps M % 7.61% -3 bps -24 bps 87 bps Real rates UDIBONO % 3.26% 6 bps 27 bps -29 bps UDIBONO % 3.71% -3 bps -11 bps -12 bps Commodities Gold 1, , % 9.02% 9.15% WTI (USD/bl) % % 41.97% UMS UMS 10 years 3.73% 3.75% -2 bps -54 bps 40 bps UMS 20 years 4.68% 4.77% -9 bps -59 bps -3 bps UMS 30 years 4.75% 4.79% -4 bps -51 bps -3 bps Stock markets (US$) MSCI Developed 7, , % 10.55% 8.15% MSCI Emerging 2, , % 17.34% 11.60% MSCI Mexico 9, , % 17.58% -8.98% MSCI Brazil 5, , % 4.91% 66.75% US Stock market DJ 21, , % 6.31% 13.42% S&P 2, , % 7.73% 9.54% Nasdaq 6, , % 15.15% 7.50% Nominal rates Tbill % 0.80% 18 bps 47 bps 35 bps Tnote % 1.81% -6 bps -18 bps 17 bps Tnote % 2.29% -8 bps -24 bps 18 bps Tbond % 2.96% -9 bps -19 bps 5 bps Real rates Tip % 0.00% 3 bps -6 bps -36 bps Tip % 0.37% 3 bps -10 bps -23 bps Tip % 0.90% 2 bps -7 bps -29 bps Bank of Mexico survey Indicator anterior PIB 1.97% 1.66% Inflation 5.90% 5.67% Cetes % 7.04% Local currency Business conditions 31-May Apr-17 Optimism 30% 21% No change 42% 55% Pessimism 27% 24% Source: Bloomberg, Banco de Mexico 9

10 IMPORTANT LEGAL INFORMATION The material has been prepared by Franklin Templeton Servicios de Asesoría México, S. de R.L. de C.V. ( FTSAM or the Company ) which has the folio inscription number (14127)-15/04/2016 in the Public Register of Investment Advisors assigned by the National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores) in terms of the Securities Market Law (Ley del Mercado de Valores). Registry does not imply compliance with the regulations applicable to the services that are provided, nor the precision or veracity of the information provided. The content of this document is for information purposes only. Past Performance is not a guarantee of future returns. The material has been prepared by FTSAM solely for use in this document, and is intended to be of general interest only and does not constitute legal or tax advice nor is it an offer for shares or invitation to apply for shares of any kind. Nothing in this document should be construed as investment advice. This document may contain information obtained from various sources, and while it may be considered reliable, the Company makes no warranty or any statement on its fidelity, accuracy, scope or coverage, as the Company has not verified, validated or audited independently such information. The information is partial and, therefore, cannot be called complete. You agree to keep the contents of this document strictly private and confidential and it shall not be disclosed, copied, reproduced or redistributed (in whole or in part) to any person without the prior written consent of the Company. This document may contain "forward looking statements" and results may vary from those expressed or implied are included in this document. Such forward-looking statements can be identified, among other words, by the use of terminology such as "expect", "anticipate", "believe", "continue", "could", "estimate", "predict", "try" "plan", "predict", "should" or other forward-looking terminology, or by the negative of these words or comparable terminology, including without limitation the plural form of these words. All forward-looking statements relate to the Company's current expectation regarding future events and are subject to a number of factors that could cause actual results to differ materially from those in respect of the forward-looking statements. One must be cautious of such statements and should not place undue reliance on any forward-looking statements. This document includes no representation or warranty (express or implied) so it should not support the accuracy, fairness or completeness of the information presented or contained in this document. Neither the Company nor any of its affiliates, employees, advisers or representatives accepts any liability for any loss or damage caused by the information presented or contained in this document. The information presented or contained in this document is current as of the date indicated and is subject to change without notice and its accuracy is not guaranteed. The information contained herein and the views, if any, expressed therein are issued on the date hereof and, therefore, are conditioned and / or subject to probable changes due to changes in applicable law, as well as the conditions and circumstances that may or may not be provided in this document, in addition to over time and other similar situations. Neither the Company, nor its affiliates, agents, employees nor advisers assume any responsibility or obligation to inform you or any other person regarding any changes to the information or opinions expressed herein resulting from matters, circumstances or events that may arise in the future or that may be brought to our attention after the date herein. This document should not be construed as legal, tax, investment or any other type of advice. This document does not constitute an offer or invitation to purchase or subscribe shares or other securities and no part of this document or any information, opinion or statement contained herein shall be the basis of, or be referred to in connection with any contract or commitment. Any decision to purchase securities in any offering of securities should be made solely on the basis of information contained in the prospectus of the securities offered. By reading this document, you agree to be subject to the above limitations. Copyright Franklin Templeton Investments. All rights reserved. Valid only in the United States of Mexico. 10