Mexico is not as reliant on oil exports as people may think. Many investors think of Latin American emerging market countries as heavy commodity exporters – and in Mexico’s case, that means oil. After all, its state-owned oil company PEMEX is one of the largest integrated oil companies in the world. Yet even at its peak in 2008, petroleum represented only 20% of Mexican exports. Since then, declines in output and prices have reduced that ratio to less than 7% – the lowest level in more than 15 years.
Mexico has a robust manufacturing sector, led by autos. Automotive exports have been growing steadily since the financial crisis and now represent nearly 30% of Mexico’s exports of goods. With the U.S. appetite for new cars back to roughly 17 million units annually, just shy of its pre-crisis level of 18 million units, Mexico is poised to capitalize on U.S. demand.
Mexico is now the largest provider of automotive goods to the U.S. It recently unseated Canada for the top position and now exports more automotive goods to the U.S. than Japan and Germany combined. Cheap labor, a shared border and free trade with the U.S. are key strategic advantages. Roughly 80% of Mexico’s exports go to its northern neighbor – a clear positive as U.S. growth is expected to outpace that of its developed market peers.
Mexico’s steadily improving fundamentals have led to a stream of credit rating upgrades – including an upgrade to A3 by Moody’s last year. And if you compare the local rate curve with other investment grade options in emerging markets, let alone those in developed market economies, the relative value of investment grade Mexican bonds looks compelling. What’s more, this relative value is likely to have legs: Mexican yields are less repressed than those in the U.S. and Mexico’s central bank is expected to lag the Federal Reserve in a tightening cycle, both in magnitude and timing.