Yield-Hungry Japanese Hitch Ride on Mexican Peso Roller Coaster

  • Firm’s Mexico bond funds’ assets are up 13% in February
  • Trump concern has weakened peso, attracting Japan investors

Mexico is becoming a favored destination for yield-hungry Japanese investors as the peso’s unprecedented weakness boosts the allure of the Latin American nation’s bonds.

Daiwa SB Investments Ltd. has seen assets of its two Mexican debt funds jump about 13 percent to 41.2 billion yen ($361 million) in February, according to information on its website. The funds received a net 8.1 billion yen in six months through Jan. 31. The firm, which oversees about $48 billion, is enjoying a surge in demand from Japanese clients searching for yield who view the Mexican currency as a bargain given the battering it took after U.S. President Donald Trump’s election win, said Kenichiro Ikezawa, a Tokyo-based senior fund manager.

“When it comes to emerging markets, the worst time is the best time to build positions,” Ikezawa said. “Some Japanese investors benefited from this strategy in Brazil and South Africa and now they are looking at who could be next.”

Read More: How Japanese investors suffered from bets in high-yield funds

The two vehicles, nicknamed Amigo funds, invest solely in the Latin American nation’s sovereign debt. They’ve returned 4.9 percent in the past month as the peso rebounded from its record low in January, according to Daiwa SB. That compares with a 1 percent gain in the Bloomberg Mexico Local Sovereign Bond Index last month.

Below are questions and answers from a phone interview with Tokyo-based Ikezawa:

What is your strategy to cope with volatile Mexican assets?

  • “The peso’s direction is solely up to Trump’s policies and his comments at this moment, while the next key event is renegotiation of Nafta -- the North American Free Trade Agreement. Our main scenario is that the renegotiation will be quite benign and they may agree to update some of the details of the 20-year-old agreement, while keeping its framework. That type of outcome could trigger a sharp rebound in the peso.”
  • “When the peso strengthens, the local sovereign bonds tend to rally. Therefore, we typically extend duration when the peso’s outlook is bullish. We are neutral now because it’s too risky to bet on either side of the scenario, which keeps us on a cautious stance.”

What is your outlook for Mexico’s economy?

  • The central bank is becoming slightly hawkish, while it may continue raising interest rates. It has also introduced a new intervention program, which has provided a floor for the peso. Due to those factors, inflation expectations may be curbed. The concern is that the economy is beginning to stagnate with rate hikes. Still, these are fairly minor concerns compared with Trump risk.
  • “Many in the market expect a rate increase of 100 basis points this year and I see it as a possible scenario.”
  • The outlook for some of the fundamental factors isn’t so bad, but the Nafta renegotiation is a significant risk because if it doesn’t go smoothly, the negative impact will be “huge.” Mexico depends on the U.S. market very heavily.

What has changed since Trump’s election?

  • “With growing uncertainties surrounding him, we need to study what type of policies he will implement, the possibility of materializing what he’s been saying and so on. Our clients are also very interested in those points and we need to produce reports on those matters. Of course, it’s becoming more difficult on the investment strategy because of those uncertainties.”

What is your outlook after Trump’s speech to Congress?

  • The peso weakened amid position adjustment before Trump’s address, but the speech didn’t provide much detail, which in a way is positive in the short term. However, nothing has changed fundamentally with regard to uncertainties from his policies.
  • Now that speculation has been growing for the Federal Reserve to raise interest rates in March, that may be weighing on the peso and across other emerging-market currencies.
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