Mexico has exceeded expectations for 2004, a trend that is likely to continue into the first half of...
Mexico has exceeded expectations for 2004, a trend that is likely to continue into the first half of 2005, fund managers at Baring Asset Management and F&C believe.
However, with a presidential election coming up in 2006, the market could suffer towards the end of next year.
Rupert Brandt, manager of F&C's Latin American Investment Trust, says: "In the medium term, we will see some storm clouds gathering overhead. The presidential election is likely to start becoming an obstacle for the markets in the second half of next year.
"The most popular candidate is the mayor of Mexico City who represents the PRD, a populist party that is fairly anti-market in its orientation. In emerging markets, things like that matter a lot more than in developed areas as they are much more fragile."
Urban Larson, head of the Latin American regional team at Barings, adds that for people involved in finance, the inflexibility of mayor Andrés Manuel López Obrador could be economically dangerous.
"His economic ideas seem to be irresponsible," he says. "He has a programme where the Mexico City government pay a monthly pension to the elderly, which is very popular and a lot of people need the money, but it is just coming out of the general budget. The concern is that he could introduce a programme like this for the whole country."
Despite this, he says that in the short term, the outlook for Mexico, whose market is becoming more and more correlated to that of the US, is very positive. Brandt says the country's geographic position is benefiting it economically.
"The Mexican economy is converging with the US economy and that is primarily driven by Nafta, which allows companies to produce things in Mexico and have the same tax consequences as if they were produced in any state in America," he says.
"Logistically it is as easy to get goods from Mexico to the US as it would be to get them from one US city to another.
"This is something that you would never be able to do in China or India for instance."
According to both managers, the manufacturing, construction, property and finance sectors have performed particularly well this year but Larson warns that, with only a slight improvement in consumer spending, structural improvements to education will be required before Mexicans can afford to contribute to the economy.
"The population is about 100 million people and there are 12.6 million people in the formal workforce, which strikes me as a fairly low level of participation," he says.
Pointing out that the total number of employed has risen by 2% in the past year, he adds: "I would say that unemployment is a structural issue for Mexico because the education system is not good.
"Poor people have to leave school early to support their families, meaning there is a big pool of unskilled labour. People who are unable to finish high school are at a disadvantage and the only way out of that is better education."
Mexican economy converging with the US.
Manufacturing and construction doing well.
Strong first half of next year expected.
Largely unskilled workforce.
Presidential election forthcoming.
Only slight increase in consumer spending.