Wall Street’s Beloved Mexican Peso Does Nothing But Disappoint

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Enrique Pena Nieto
Enrique Pena Nieto, Mexico's president. Photographer: Susana Gonzalez/Bloomberg

In recent years, few currencies in the world have been touted more by Wall Street than the Mexican peso. No less than the likes of Bill Gross has sung its praises.

And ever since, one thing has been constant: disappointment. Billed by strategists as a sure-fire top performer every year since 2012, the peso dropped in 2013 and 2014. This year, Mexico’s peso reached a record low, defying analysts’ predictions from December that it would gain 9.3 percent. Of the world’s 16 major currencies tracked by Bloomberg, none has fallen so short of its projections.

The peso’s story of high hopes and dashed expectations is largely a microcosm of Mexico’s economy since President Enrique Pena Nieto took power with promises to unleash unprecedented growth by jettisoning the nation’s 75-year-old oil monopoly. Latin America’s second-biggest economy is such a dud that analysts have already cut their forecasts for this year by almost a full percentage point. Just three times in the past 11 quarters has growth come in line with estimates.

“Expectations around structural reforms were overinflated,” said Juan Carlos Alderete, a currency strategist in Mexico City at Grupo Financiero Banorte. “The peso reflects the market’s attitude, which is ‘pay-per view.’ I’ll pay for it when I see it.”

At 15.1288 per dollar as of 12:58 p.m. in New York after falling 2.5 percent this year, the peso is now within about 3 percent of the record low it reached on March 11.

Lackluster Growth

The slump has been driven in part by a 46 percent plunge in the price of oil since June, which has tempered enthusiasm for the nation’s historic changes to its energy laws.

The hit to the country’s tax revenue has prompted Pena Nieto, 48, to cut government spending, depriving the economy of much-needed stimulus. Analysts surveyed by Bloomberg now expect gross domestic product to expand just 2.8 percent this year. That’s well below the 4.4 percent average rate in the three years through 2012, when Pena Nieto took office.

In February 2013, Gross, then-chief investment officer at Pacific Investment Management Co., dubbed the peso a “great currency” in a Twitter post. Later that year, BlackRock Inc. Chief Executive Officer Laurence D. Fink said Mexico’s energy reforms were the beginning of a “real revolution” and that the nation was his favorite international investment destination.

Erin Freeman, a spokeswoman for Gross’s current employer, Janus Capital Group Inc., declined to comment.

Ed Sweeney, a spokesman for BlackRock, pointed to a 2014 blog post in which Fink said Mexico’s transformation would happen “over the next few decades” and a letter to shareholders last month noting that the peso had sold off along with other emerging-market currencies.

‘Look Great’

Pena Nieto did indeed follow through on the policy changes he promised, changing the constitution in 2013 to open the door for foreign companies to drill in Mexico for the first time since 1938. His administration estimates the energy-law overhaul will help bring in $62.5 billion in private investment and help lift annual growth close to 5 percent by the end of his term in 2018 and add at least 1 percentage point to Mexico gross domestic product by 2018.

“Fundamentals on paper look great,” but “growth continues to underperform market expectations,” Mark McCormick, a foreign-exchange strategist at Credit Agricole SA, France’s second-largest bank by assets, said by e-mail. “We remain peso bears.”

Still, there’s no shortage of Mexican peso bulls.

Wells Fargo & Co. and Morgan Stanley said last month that the peso’s underperformance was unjustified. Strategists surveyed by Bloomberg expect the Mexican currency to gain 1.9 percent by year-end, the most in emerging markets.

Peso Bonds

Scott Mather, who helped take over the management of Pimco’s $117 billion Total Return Fund after Gross left in September, said in a blog post Monday that Mexico’s peso debt has “compelling” relative value, citing credit-rating upgrades. He said Mexico is poised to benefit from U.S. demand for the cars and auto parts the Latin American country makes.

Despite these calls, the peso remains on track to extend its streak of disappointments. Last year, analysts predicted a 3.6 percent increase only to see the currency tumble 12 percent, the most since the financial crisis in 2008.

For Bhanu Baweja, the head of emerging-markets cross-asset strategy at UBS AG, the peso’s underperformance is a cautionary tale for investors in developing nations such as India and Indonesia who are betting government reforms will lead to faster growth.

“The idea of reform is a very elegant idea in theory, but in practice, oftentimes it means weaker growth rather than stronger growth, at least in the near term,” Baweja said by phone from London. “It’s a slow-pace improvement.”

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