Emerging Markets Spotlight - Revisiting Mexico

“U.S. Strikes Gentler Tone on NAFTA as Talks Countdown Begins.”  - Bloomberg headline, May 18, 2017

Mexico is an equity market that has generally been one of the less- volatile emerging markets in recent years. Mexico is an OECD member with (relatively) stable politics, a highly regarded central bank and a limited presence in the stock market of the more cyclical commodity sectors, all of which tend to dampen swings in equity prices.

The past year has been very different, though. The election of Donald Trump after primary and presidential campaigns in which he repeatedly criticized NAFTA, Mexico and even the Mexican people had a dramatic impact on both the currency and the equity market, with MSCI Mexico down 13.1% in U.S. dollar terms in November 2016. In 2016, Mexico exported a total of $374 billion of goods, $303 billion of which went to the U.S. (with a further $10 billion to Canada, also under NAFTA). In addition, Mexico is a substantial beneficiary of tourist visitors, worker remittances and FDI flows from the U.S., so a collapse in U.S.-Mexican trade relations would be disastrous for the southern partner.

The fall in Mexican capital markets was intensified by rising U.S. bond yields, being driven higher by the U.S. recovery and by expectations that the Trump administration's reflationary policy agenda would push structural inflation higher in the U.S.

Finally, there was increasing concern that the 2018 presidential election might return a nationalist populist, Andrés Manuel López Obrador (AMLO), which would be a clear negative for both the Mexican economy and corporate Mexico, with further risks to the relationship with the U.S.

Six months on, these risks have largely (but not completely) passed. The Trump administration has not been able to move its legislative agenda forward with any real success.

U.S. Trade Representative Robert Lighthizer sent formal notification to the U.S. Congress that he intended to renegotiate NAFTA, but the language used speaks more to modernizing and updating than to terminating it. To be clear, there are still risks that the talks could break down, or that the U.S. administration could return to demonizing Mexico.

Meanwhile, U.S. bond yields have retraced about half of their post-election move, as U.S. fiscal stimulus has been delayed and inflation remains stubbornly low, which eases the pressure on EM currencies. The domestic Mexican political situation remains fluid, but the victory for the ruling PRI party in the gubernatorial election in the key State of Mexico shows that opposition to AMLO will be robust.

Mexico is still working through the inflationary impact of the currency sell-off in 2016, with Banxico having hiked policy rates three times this year, following six hikes in 2016. The move in policy rates from 3.0% to 6.75% will drag on the economy, but growth should remain positive this year, and Mexican equities have historically been one of the most defensive in economic downturns. Mexican equities have significantly de-rated, with the premium that Mexican assets attract over other emerging markets coming back to its long-term average.

Accordingly, we have moved our weighting in Mexico from zero toward a neutral position. Our preference is for high-quality, domestic demand-focused companies with strong growth prospects. We have added a large retailer and a cable-based media company benefiting from growth in TV and internet consumption in Mexico.

An investor should consider the Fund’s investment objectives, risks, and charges and expenses carefully before investing or sending any money. This and other important information about the Fund can be found in the Fund’s prospectus or summary prospectus, which can be obtained at www.johcm.com or by calling 866-260-9549 or 312 -557-5913. Please read the prospectus or summary prospectus carefully before investing. JOHCM Funds are advised by J O Hambro Capital Management Limited and distributed through FINRA/SIPC member BHIL Distributors, LLC. JOHCM Funds are not FDIC-insured, may lose value, and have no bank guarantee.

RISK CONSIDERATIONS: The Fund invests in international and emerging markets. International investments involve special risks, including currency fluctuation, lower liquidity, different accounting methods and economic and political systems, and higher transaction costs. These risks typically are greater in emerging markets. Such risks include new and rapidly changing political and economic structures, which may cause instability; underdeveloped securities markets; and higher likelihood of high levels of inflation, deflation or currency devaluations.

Emerging markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity.

The small- and mid-cap companies in which the Fund may invest may be more vulnerable to adverse business or economic events than larger companies and may be more volatile; the price movements of the Fund's shares may reflect that volatility.

The views expressed are those of the portfolio manager as of June 2017, are subject to change, and may differ from the views of other portfolio managers or the firm as a whole. These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice.