InvestmentsApr 22 2013

Mexico has the same core inflation rate as the US

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On a recent visit to Mexico I asked one of the local pension funds for their best investment idea.

The response – the Mexican peso – was unexpected. However, by the end of the week I could see the point. Mexico has virtually the same core inflation rate as the US but overnight rates are 4 per cent. Moreover, Mexico’s constitution forces it to run a balanced budget in sharp contrast to Washington’s fiscal profligacy.

Meanwhile its debt-to-GDP ratio is less than 45 per cent and falling, compared to more than 90 per cent in the US, according to the International Monetary Fund (IMF).

The so-called Pact for Mexico should raise the long-term growth potential of the economy from 3.5 per cent to 5 per cent, the IMF has said. While the central bank cut policy rates by 50 basis points in an unexpected move, the currency strengthened and is the best-performing major currency against the dollar in the past year.

The equity market has also performed well. However, the quality of the companies available in Mexico and the opportunity for growth north of the border in the US, where the Hispanic population is growing fast, suggest its worth paying a premium. Currency strength will also boost profitability for companies such as Arca Continental, a Coke bottler, whose costs are effectively denominated in dollars.

Julian Thompson is portfolio manager of the Axa Framlington Emerging Markets fund