2014
Mexico
South America
Central America
FOR INFORMATIONAL USE ONLY
FOR GFG CAPITAL PRESENTATIONS ONLY HIGHLY CONFIDENTIAL
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This presentation (the "Presentation") has been prepared solely for information purposes
and is not intended to be an offer or solicitation and is being furnished solely for use by
prospective clients in considering GFG Capital, LLC ("GFG Capital" or the "Company")
as their Investment Advisor.
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making their own evaluation of GFG Capital and does not purport to contain all of the
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should be addressed to GFG Capital at 305-810-6500.
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Mexican Economy
Mexico remains in a solid footing now and in the future, however going into 2014 optimism
was very high, which kept us on the sidelines waiting for a better entry point…
•
Mexico is the 9th largest oil producer in the world.
•
They produce roughly 3 million barrels a day, which is slightly less then UAE, and more than Kuwait
•
While the country is very much dependent on oil, it is less so then in 1990. Oil share as a percent of
Mexico’s exports is now 11%, versus 40% in 1990.
•
Mexico has however, done a fine job at hedging their exposure to oil. Mexican Finance Minister
Luis Videgaray said that Mexico insured its oil exports at $76.40 per barrel for 2015. This should help
create stability in the market for 2015.
•
The large drop in oil is not likely to prevent foreign corporations to continue to come in for energy
investment, however it is likely to slow it in the near term. The lack of foreign capital has hurt the
currency and raises inflation expectations.
•
Roughly 70% of Mexico’s exports are to the US, which remains in a favorable state currently.
•
All in manufacturing cost are also playing a favorable role for Mexico. Mexican wages have
grown less than 50% in dollar terms over a decade, leaving them roughly 13% cheaper than
China’s. In addition energy prices have dropped, helping input costs for production.
GDP growth rate as of August was 2.2%.
Unemployment 4.78%
Inflation 4.17%
Current Account to GDP -1.8%
PMI 53.05
4
Source: Data: Derived using Bloomberg economic statistics. The above comments are only the views of GFG Capital and should be analyzed by the observing party prior to any investment decisions.
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Peso is Highly Correlated to the Price of Oil
Brent
Crude Oil
Peso
•
5
The correlation as shown in green, highlights that the Peso has typically become weaker as oil falls. 2013 was one of the
few years where the Peso and Oil had a negative correlation. Oil moved higher, but the Peso weakened. The outlook
over the next several years is for oil to rise from these very low levels. Also, as stated on the previous page, Mexico is
becoming less dependent on oil exports. We likely see continued pressure on the Peso as oil stays low for the first half of
2015. However, we are paying close attention for investment purposes as it becomes more attractive.
Source: Data: Derived using Bloomberg statistics. The above comments are only the views of GFG Capital and should be analyzed by the observing party prior to any investment decisions.
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Energy Reform Update
Energy reforms in Mexico continue to move forward, however at a slower pace given the
moves in commodity prices.
6
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On February 27 the National Hydrocarbons Commission (NHC) released details of the second
stage of Round 1 bidding for fields in the area. This highlights the governments focus on moving
forward with the reforms.
•
The oil fields announced so far are amongst the most profitable, making them attractive even in
the context of lower oil prices.
•
The biggest hold up comes from the oil heavy and deep water fields. These were expected to be
tendered during 2015, but the drop in oil is likely pushing this back into 2016-2017.
Source: Data: Derived using Bloomberg economic statistics. The above comments are only the views of GFG Capital and should be analyzed by the observing party prior to any investment decisions.
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Mexican Peso
Below highlights the USD/Peso. The drop in oil and fear of FED rate hikes has sent the pair to 7 year highs. We
remain cautious above the 15.3 level. We would not want to own Peso above this level, and would only be
active if we dropped back below this mark. The catalyst for this pair to drop is Banxico hiking rates to stem
inflation fears in the area.
7 Year USD/MXN
7
Source: Data: Derived using Bloomberg statistics. The above comments are only the views of GFG Capital and should be analyzed by the observing party prior to any investment decisions.
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Mexican Equities
On an absolute basis we have been cautious on Mexican equities given their high valuations relative to the world. This valuation
premium was driven by the reform agenda by the local government. We believed that the market was far too optimistic. Today, the
market is much more attractive and we are paying close attention to entry points. The Mexican Bolsa is levered to the price of oil,
which is the key concern. The top graph is the absolute price to book value, the bottom chart is the Mexican price to book versus
the S&P 500. Both are trading at premium levels still.
Mexican Bolsa Price to Book Value Since 1990
8
Source: Data: Derived using Bloomberg statistics. The above comments are only the views of GFG Capital and should be analyzed by the observing party prior to any investment decisions.
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South & Central America
Latin America in its entirety is a complicated place in todays market. The complexity stems from the
divergence in central banks, policy rates, fx moves, and exposure to specific commodities such as oil and
copper. As a whole, nothing looks attractive just yet in Latin America. This view is based on that the specific
markets are either valued highly and still carry a high premium multiple (i.e. Mexico), or the country is heavily
exposed to the shock in specific commodity prices, (i.e. Colombia). With that, we look elsewhere, and have
been focusing most of our attention in Asian investments, given their benefit from lower commodity prices (i.e.
oil).
Inflation
Unemployment
Current Account
Retail Sales
Latin/Central America
Latin/Central America
Latin/Central America
Latin/Central America
Brazil
Mexico
Argentina
Colombia
Chile
Brazil
Mexico
Argentina
Colombia
Chile
Brazil
Mexico
Argentina
Colombia
Chile
Brazil
Mexico
Argentina
Colombia
Chile
7.70%
3.00%
20.90%
4.36%
4.40%
Inflation
Unemployment
Asia Pacific
China
Singapore
Taiwan
Japan
South Korea
Indonesia
Malaysia
India
Australia
5.30%
4.43%
6.90%
11.84%
6.20%
Current Account
Asia Pacific
1.40%
-0.40%
-0.19%
2.40%
0.50%
6.29%
1.00%
7.17%
1.70%
China
Singapore
Taiwan
Japan
South Korea
Indonesia
Malaysia
India
Australia
-4.17%
-1.85%
-0.95%
-4.23%
-1.91%
Asia Pacific
4.09%
1.90%
3.78%
3.60%
3.40%
5.94%
6.30%
China
Singapore
Taiwan
Japan
South Korea
Indonesia
Malaysia
India
Australia
0.60%
2.40%
9.56%
1.20%
Retail Sales
Asia Pacific
2.09%
19.09%
12.45%
0.54%
4.63%
-1.30%
-2.40%
China
Singapore
Taiwan
Japan
South Korea
Indonesia
Malaysia
India
Australia
11.90%
-5.00%
-5.04%
-2.00%
-5.00%
12.50%
3.60%
10 Source: Data: Derived using Bloomberg economic statistics. The above comments are only the views of GFG Capital and should be analyzed by the observing party prior to any investment decisions.
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South & Central America Valuations
If you look into Latin America as a whole you see a ton of markets that are trading at discounted levels. This
discount is a function of the weak economic conditions of the specific markets. We believe that this discount
is warranted throughout the region. Our highest convictions on a relative basis to the rest of Latin America
remains Mexico and Chile. This view is from future prospective growth, reform agendas, and trade
relationships.
Market
Price to Earnings
Price to Book
Price to Sales
S&P 500
18.2
2.8
1.8
Brazil
13.5
1.2
0.9
Colombia
15.7
1.2
1.9
Chile
20.2
1.5
1.0
Venezuela
16.6
5.0
5.5
Mexico
29.1
2.8
1.7
11 Source: Data: Derived using Bloomberg statistics. The above comments are only the views of GFG Capital and should be analyzed by the observing party prior to any investment decisions.
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South & Central America Inflation
Below highlights the benefit and pain that oil importers and exporters receive on the basis of oil moves. The
right is the oil exporters, and shows how Mexico, Venezuela and Colombia are most effected from the Latin
American region. The left highlights the importers where many Asian nations show up.
Impact of 25% drop in oil prices on 2015
(Current Account Balance for Oil Importers)
Impact of 25% drop in oil prices on 2015
(Current Account Balance for Oil exporters)
12 Source: Data: Derived using Bloomberg economic statistics and IFF Calculations. The above comments are only the views of GFG Capital and should be analyzed by the observing party prior to any
investment decisions.
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South & Central America Inflation
Inflation remains a concern in Latin America, especially given the backup in most currencies. We have seen a
continued fall in inflation throughout the region over the last 5 years, however lower currencies have shifted
inflation trends higher. We continue to monitor inflation figures as shown by the chart below.
South & Central America Inflation
13 Source: Data: Derived using Bloomberg economic statistics. The above comments are only the views of GFG Capital and should be analyzed by the observing party prior to any investment decisions.
For one on one presentations only
Conclusion
Central & South America continues to move through a cycle of depressed commodity prices.
We have the mindset of “the strong will survive”, and may mean that some better run
economies such as Mexico will benefit.
•
Mexico is our highest conviction market in the region given its relationship with the US, and reform
agenda. The market is not cheap therefore we remain on the sidelines.
•
Inflation in the region is of focus in our view, as is debt levels for countries like Argentina and
Venezuela.
•
Within Emerging Markets, Asia is the biggest beneficiary lower oil and why we hold a constructive
position in the region.
14 Source: Data: Derived using Bloomberg economic statistics. The above comments are only the views of GFG Capital and should be analyzed by the observing party prior to any investment decisions.
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