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Trade, Trump, Tariffs—Wither Mexico?

As investors navigate the tactical skirmishes of President Trump’s strategic battle on global trade, it’s worth taking a step back to observe how different countries are responding to changes in currency and interest rate values. And on this basis, Mexico’s external performance has been impressive.

Through the second quarter of 2019, Mexico generated a current account surplus of 1.0% of gross domestic product (GDP), its largest surplus in 30 years!

Chart 1

The goods trade balance is the highest since the Tequila Crisis in the mid-1990s; although Mexico’s energy balance has deteriorated in recent years, the manufacturing trade surplus has more than offset this weakness. Meanwhile, the services trade balance is the highest in 20 years as tourism has risen sharply—more Americans traveling south of the border and more Mexicans staying home—which is exactly what one might expect in response to the price signal from a weak currency.

Chart 2

Despite the ongoing existential fears around the fate of NAFTA, foreign direct investment flows have remained stable in recent years, leaving Mexico with a basic balance of payment1 surplus position it has not enjoyed—on any sustained basis—since the mid-2000s, a period when the currency was nearly 30% stronger than current levels, in real terms.

Chart 3

Admittedly, this performance may not last. Given the volatility in trade data and given the ongoing slowdown in U.S. manufacturing surveys, Mexico’s trade position may weaken somewhat from current levels. Additionally, U.S. Congress has yet to pass USMCA and risks remain that impeachment proceedings against President Trump could delay any meaningful attempt to pass a NAFTA replacement until after the 2020 U.S. presidential election.

Nevertheless, Mexico’s trade balance, compared to its own history and compared to other emerging markets, is faring impressively well through the ups and downs of the global cycle in recent years. Looking through all the noise, the performance of Mexico’s external balance suggests the peso remains undervalued.

1 The basic balance of payments is comprised of the current account and capital account balances.

Groupthink is bad, especially at investment management firms. Brandywine Global therefore takes special care to ensure our corporate culture and investment processes support the articulation of diverse viewpoints. This blog is no different. The opinions expressed by our bloggers may sometimes challenge active positioning within one or more of our strategies. Each blogger represents one market view amongst many expressed at Brandywine Global. Although individual opinions will differ, our investment process and macro outlook will remain driven by a team approach.