What’s Good for GM Turns Out Good for Mexico BondholdersNacha Cattan
It turns out that what’s good for General Motors Co. is also good for investors in Mexican bonds.
The country’s peso-denominated notes have gained 3.4 percent in dollars this month after reports showed auto exports led by GM’s trucks and manufacturing output soared, helping fuel optimism growth is picking up in Latin America’s second-biggest economy. The bond advance is twice the average for emerging markets.
The surge in exports to the U.S., Mexico’s biggest trade partner, adds to signs the nation is finally pulling itself out of a slump that resulted in the weakest growth last year since its recession in 2009. Mexico, a production hub for America’s major carmakers, ships 71 percent of the vehicles to the U.S. including those made by GM, whose former head once told Congress that what’s good for the carmaker is good for America.
“As long as prospects for a sustained U.S. recovery remain intact, that will support higher growth expectations” in Mexico, Robert Abad, who helps oversee $53 billion at Western Asset Management, said by e-mail. “It looks like we’re getting to the point where we’re finally seeing the traction we’ve all been talking about” on growth.
Mexico’s car exports rose 8.7 percent in the January-to-April period from a year earlier, led by a 34 percent jump in sales of GM’s Silverado 2500 trucks.
The U.S. economy, the world’s biggest, will grow 2.5 percent this year, up from 1.9 percent in 2013, according to the median estimate in a Bloomberg survey.
Mexican shipments of everything from oil to cars climbed 3 percent in the first quarter, compared with a 1.4 percent drop a year earlier. The increase in automobile exports stands in contrast to a 2.3 percent decline in the same period in 2013.
President Enrique Pena Nieto said May 12 that the economy is headed “in the right direction” after March industrial production rose more than economists expected, led by a 6.8 percent increase in manufacturing output from a year earlier that was the biggest since February 2012.
“Mexican assets are getting the support of positive expectations about future growth,” Marco Oviedo, the chief Mexico economist at Barclays Plc, said by e-mail. “Mexico is the country that benefits the most from a U.S. acceleration.”
GM didn’t respond to phone and e-mailed requests seeking comment. The company has four plants in Mexico and employs a total of 15,000 workers nationwide.
Joe Kogan, the head of emerging-market strategy at Bank of Nova Scotia in New York, said the jury is still out on whether the economy is gaining momentum and restoring investor confidence built up on ratings upgrades and laws to open the oil industry.
Moody’s Investors Service lifted Mexico’s rating to A3 on Feb. 5, citing constitutional changes to open the energy industry to more foreign investment and broaden the tax revenue base. The ratings company projects the country’s long-term average growth rate will quicken to between 3 percent and 4 percent, from a range of 2 percent to 3 percent.
The economy expanded just 1.1 percent in 2013.
“Mexican growth has been of concern for the past year,” Kogan said by e-mail. “It’s actually been rather ironic since there was all this optimism around potential long-run growth going to 5 percent due to reforms at the same time that actual growth was slowing down to 1 percent.”
Rising demand for higher-yielding assets coupled with prospects for faster growth have helped spur gains in Mexican bonds, according to Edgardo Sternberg, an emerging-market money manager at Loomis Sayles & Co.
The extra yield investors demand to own 10-year peso bonds instead of similar-maturity U.S. Treasuries narrowed to 3.30 percentage points May 13, the least since October, according to data compiled by Bloomberg. The peso declined 0.5 percent to 12.9655 per dollar at 12:25 p.m. in New York.
“The spread compression comes mostly from people looking for a little bit more yield and for people looking for better stories,” Sternberg, whose firm oversees $200 billion, said by phone from Boston. “Mexico certainly has a better story thanks to reforms and thanks to a little bit more growth.”