Mexico could be the market to offer investors a wealth of unlikely opportunities in 2017, akin to Brazil’s significant outperformance last year, according to Jupiter’s Ross Teverson.
The manager, who heads up the four crown-rated Jupiter Global Emerging Markets fund, says Trump’s protectionist rhetoric has led to bearishness on the country, which means many fundamentally attractive Mexican firms are cheaply valued.
Performance of indices since US election 2016
Source: FE Analytics
He says the country is viewed in a similar way to how Brazil was at the start of last year, as many investors grew cautious on the country’s political uncertainty and the low price of commodities.
“I really do believe there are parallels between Mexican stocks in response to Trump and what was happening early in 2016 to Brazilian stocks in response to the political noise there,” Teverson (pictured) said.
“Obviously the two situations are very different in nature, but when I say there’s a strong parallel, I mean that the market is too concerned about the next piece of news flow. It’s not focusing enough on the underlying fundamentals of the companies listed in Mexico.”
The manager’s ability to block out short-term noise regarding regions or sectors stood the fund in good stead last year.
Despite a strong return from the MSCI Emerging Markets index in 2016, particularly in sterling terms, Jupiter Global Emerging Markets achieved a top-quartile return of 36.29 per cent compared to its average peer and benchmark’s respective returns of 30.75 and 32.61 per cent.
“This time last year, it was quite common to hear people say Brazil was uninvestable. I don’t think that is ever a sensible way to think of a market,” Teverson explained.
“What people really meant when they said it was uninvestable was [that] they were concerned about what the next piece of newsflow would be: whether that would be negative and whether that would send the market down further.
“The fact is that, even in markets like Brazil and when you’re having a very difficult time – as Brazil was at the start of 2016 – there are individual companies that are continuing to perform well and where the long-term prospects remain very strong.”
One such company that the manager bought into last year was Ser, a Brazilian education company which operates universities across the North of Brazil.
The stock was trading at a 5x P/E ratio at time of purchase, but Teverson believed its strong balance sheet and high margins would lead the company to multiply in size over the longer term. By the end of 2016, the stock had been one of the fund’s largest positive contributors throughout the year.
“For us we found that just keeping entirely focused on the bottom-up research and not being distracted by some of the shorter term macro headlines was important for generating performance because positions like that subsequently went on to perform very well,” he said.
“Another example of us benefitting from the market’s short-termism last year was First Quantum. First Quantum is a Canada-listed copper miner. The reason that we consider it to be an emerging market business is its assets are largely in Zambia and in Panama.
“We liked the company because we see a significant change taking place as they ramped up their greenfield copper mine. That positive longer-term story of increasing production from First Quantum was completely clouded by the fact the price was weak during the first half of last year.”
Now though, Teverson is positive on the number of opportunities he is finding in Mexico, despite the fact Trump is expected to implement an import tariff on the country.
This is particularly worrying for investors, given the US accounts for a vast majority of Mexico’s trade.
“I was in Mexico in January. I was actually there the day that Trump was inaugurated. Speaking to companies on the ground there, you see a very limited impact from Trump and one could say it’s too early to tell because Trump is just getting started on implementing his policies,” the manager reasoned.
“But I think a really telling insight would be a company like Vesta, which builds and leases factories to multinational companies including US auto companies, which are in the firing line of Trump’s rhetoric. Even that company is not seeing significant change in the intention of its tenants.
“If you look at the plans that Vesta has for 2017 and 2018, it’s continuing to build new factories and clients are continuing to commit to expanding their manufacturing presence in Mexico.
“If you look at why that is, it’s not surprising when you think Mexican wages are between one-eighth and one-fifth of what they are in the US.”
Even if Trump does implement trade tariffs on Mexico, Teverson says the country will remain a much more competitive manufacturing hub than the US.
He also points out that capacity utilisation is already high in US auto plants so, even if US auto manufacturers were willing to relocate their production, there would be little scope for them to do so.
This is particularly significant, given the automotive industry accounts for almost one-fifth of Mexico’s manufacturing sector.
“The most important consideration is that the supply chain of auto manufacturers is complex and it transcends that border,” the manager concluded.
“The manufacturing of parts and autos in Mexico and the US is already so integrated that it would be extremely disruptive to do anything to make that trade difficult.”
Since Teverson took to the helm of Jupiter Global Emerging Markets in 2015, it has returned 33.22 per cent compared to its sector average and benchmark’s respective returns of 23.95 and 25.83 per cent.
Performance of fund vs sector and benchmark under Teverson
Source: FE Analytics
While the fund has a top-quartile Sharpe ratio (which measures risk-adjusted returns) over this timeframe, it is in the bottom quartile for its annualised volatility and maximum drawdown (which measures the most money lost if bought and sold at the worst times), suggesting it may not be best suited to the more cautious investor.
It has a clean ongoing charges figure of 1.38 per cent.