Templeton Joins Ranks of Mexico Peso Bulls Despite Trade's Flop

  • Peso is forecast to weaken further after 21% drop since 2013
  • Pimco, BlackRock have remained bullish on Mexico assets

With his bet on the Mexican peso, Franklin Templeton’s Michael Hasenstab is joining the likes of investing giants Bill Gross and Laurence D. Fink who’ve championed the country’s assets. He also may be destined for disappointment.

The peso has largely been a money-losing trade since the nation’s historic overhaul of energy laws two years ago -- including the jettisoning of its seven-decade monopoly -- provoked a wave of investor goodwill. The currency has tumbled 21 percent since the end of 2013, hitting a record low in August, as the collapse of oil prices upends optimism the reforms will unleash foreign investment in Latin America’s second-biggest economy. 

Michael Hasenstab

Source: Franklin Templeton Cos LLC

And the outlook for the peso isn’t getting better as the prospect of higher U.S. interest rates threatens to deepen a selloff in emerging-market currencies. Mexico’s tender will sink 3 percent by the first quarter of 2016, according to forecasters in a Bloomberg survey. Still, Hasenstab, a money manager who oversees $140 billion in assets at Franklin Templeton, said Oct. 6 that he’s buying the peso as part of what he calls a multi-decade chance “to be buying very cheap assets.”

“From a long-term valuation perspective, maybe five to 10 years, the peso looks cheap, but our outlook in the short-term is much more bearish,” Mark McCormick, a strategist at Credit Agricole CIB, said from New York.

The peso has been unfairly punished because it’s used by investors as a hedge against other emerging-market risk, Hasenstab said in an e-mailed response to questions.

“Since the macroeconomic fundamentals do not justify these levels we view this as a tremendous long-term opportunity to invest in the peso,” he said. The currency was little changed Monday at 16.4172 per dollar as of 11:28 a.m. in New York.

In his 20 years at Franklin Templeton, Hasenstab has earned a reputation for making large bets on assets when they were tumbling. He made billions of dollars by snapping up Irish debt in July 2011, eight months after the country entered an international bailout.

His wagers haven’t always paid off, however. He invested in Ukraine before the country defaulted in the wake of a war that devastated its economy. A Templeton-led creditor committee holding about half of the country’s $18 billion Eurobonds reached a restructuring deal with the government in August.

Hasenstab’s Templeton Global Bond Fund, which manages $58 billion, has lost 4 percent this year, trailing 72 percent of its competitors, as some emerging-market investments faltered, according to Morningstar Inc. It returned 7.3 percent annually over the past decade, beating 99 percent of its peers. At the end of June, the fund had invested about 9 percent of its assets in Mexico, the second-largest holding, according to the company’s Website.

Franklin Templeton funds added about $2.9 billion in Mexican peso assets in May, June, and August of this year, according to the latest filing data compiled by Bloomberg. Those purchases were mostly made in debt due within the next two years.

While Mexico’s local debt has lost 7.1 percent in dollar terms this year, that’s still less than the average 9.1 percent slump in emerging markets, Bank of America Corp. indexes show.

Gerardo Rodriguez, a money manager at BlackRock Inc., says that given how other local-currency assets have performed, Mexico has been the place to be. The New York-based firm has touted Mexico since at least 2013, when Chief Executive Officer Fink called the country “a tremendous opportunity.”

Mexico is “one of the economies that has something unique and idiosyncratic going for it,’” Rodriguez, who manages more than $100 million in emerging-market assets, said from New York. “Going forward, returns are going to be very much a function of what happens with the dollar against other currencies and, in general, the tightening of financial conditions in the U.S.”

Rodriguez says that Mexico’s longer-dated local bonds and interest-rate swaps are the most attractive.

Gross, who joined Denver-based Janus Capital Group Inc. last year after leaving Pacific Investment Management Co., said in a Twitter post in June that Mexico offered the “most attractive yields in the world.” He emerged as a Mexico bull years ago, when he was still running Pimco, at the time the world’s biggest bond fund.

Despite Gross’s departure, Newport Beach, California-based Pimco continues to favor Mexico.

Lupin Rahman, a London-based money manager at the fund, said in a Pimco blog post on Thursday that she’s “constructive on Mexican assets” and that she expects “the economy to fare current global headwinds relatively well.”

Still, she acknowledged the pace of reforms in the energy industry has “disappointed relative to our expectations.”

To Pictet Asset Management’s Simon Lue-Fong, Mexico will continue to disappoint. He points to the likelihood the country’s central bank will raise interest rates in lockstep with the Federal Reserve, which will make peso bonds unattractive. He’s also underweight Mexico’s currency.

“Mexico is a deteriorating credit in slow motion, despite all the positivity,” Lue-Fong,  the head of emerging-market debt at Pictet, said in an interview with Bloomberg Brief published Oct. 7. “I find it difficult to be excited.”

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