CDMX / ZMVM

Mexico’s Bonds May Be Reaching a Bottom. Stocks Are Still Being Punished.

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People walk by a panel displaying U.S. dollar and euro currency symbols at an exchange office on March 13, 2020 in Mexico City.

Would you buy a 10% or 12% bond from this man? If the man is Mexican President Andrés Manuel López Obrador, and the bond issued by state oil monopoly Petróleos Mexicanos, the answer might be yes. In spite of everything.

The downgrade of Pemex’s debt, all $105 billion of it, to junk status on April 17 looks like a calamity.

“This is the largest fallen angel in history by a factor of two or three,” says Aaron Gifford, an emerging markets sovereign analyst at T. Rowe Price, referring to corporate issuers that lose investment-grade status.

down by three-quarters this year, traders took the downfall as already priced in. Pemex bonds barely budged on the news.

“That yield for Pemex sounds pretty good, and it is,” says Till Moewes, Latin American corporate credit analyst at Schroders.

A possible bottom for Pemex’s debt points to a broader resilience in the Mexican economy as it is battered from all directions. Mexican securities have been among the worst punished

as markets collided with Covid-19.

The iShares MSCI Mexico exchange-traded fund (ticker: EWW) has plunged more than 40% in the past two months, compared with a 17% drop in global emerging markets. The peso has lost 23% against the dollar.

. “The economy has four pillars—tourism, remittances, oil exports, and manufacturing exports to the U.S.—and they’re all being crushed,” says Luis Maizel, Mexican-born founder at LM Capital Group.

But AMLO, as the Mexican leader is known, is also flunking the Covid leadership test so far. He started with virus denial, then shifted to a stoic insistence that his “republican austerity” policy can plow ahead unaltered.

The president has warned businesses that they could face legal action for firing workers, but offered no help in keeping them on board. The majority of Mexicans who work informally have seen no lifeline, either.

“One thing we’ve learned is that he doesn’t really understand economics,” says Duncan Wood, director of the Mexico Institute at the Wilson Center.

Prospects for a sharp rebound in Mexican equities are dim. The stock index is dominated by consumer-facing companies like cellular network América Móvil (AMX), Wal-Mart de México (WALMEX.Mexico), and beverage bottler and retailer Fomento Económico Mexicano (FMX).

They can hardly grow with a national economy that will shrink by 7.5% this year and only bounce back 2% next year, according to the forecast of Nur Cristiani, Mexico equity strategist at J.P. Morgan Asset Management.

But Mexico has always played a bigger role as a fixed-income market, and here its stolid DNA is a plus in tough times.

“The classic Mexican manager is a conservative patriarch, while Brazilians embrace the aggressive private-equity style,” says Schroders’ Moewes. “Yet quite a few Mexican companies are trading wide to Brazilian counterparts.”

Pemex is trading way wide, seven or eight percentage points, to equivalent paper from AMLO’s parsimonious Mexican state. That’s an attractive arbitrage, assuming the nationalist president would never allow the humiliation of default by the national economic symbol.

On the other hand, we are living through a never-say-never period.

“We’ve been rotating into the convergence trade of selling the sovereign and buying Pemex,” says T. Rowe’s Gifford. “But it’s a little too early to pound the table and go massively overweight.”