Mexico: GEM funds wrong footed after election results

Copley Fund Research

Active GEM fund managers were caught off guard with their exposure to Mexico heading into the election. The nation had benefited from increased inflows and exposure over the past 3-4 years, with the percentage of funds invested reaching an all-time high of 94.6%. However, the country’s positioning against the benchmark is where it truly stands out, with the percentage of EM funds overweight the benchmark now at 69% compared to just 20% in 2011. This proved costly in the wake of the elections, with crowded stocks like Banorte experiencing big price declines. As it stands in the EM space, Mexico is the largest overweight by average fund weight and the second most common overweight after Indonesia.

- 12 July, 2024

Banorte (GFNORTEO MM) Mexico

Financials

Galliano's Financials Research

Triple jeopardy in play for 2024? Victor Galliano thinks management’s guidance for this year is overly optimistic due to: 1) Structurally rising capex and opex, especially in view of the launch of digital bank Bineo this month, but also to support the growth of Rappicard; this is at least partly in response to intensifying competition from the likes of Nu Mexico. 2) NIM pressure - expects more widespread competition for deposits from other commercial banks as well as fintechs to pressure system margins further. 3) With system delinquency trends deteriorating, Victor believes this will catch up with Banorte in coming quarters in the form of a steadily rising cost of risk.

- 09 February, 2024

Banorte (GFNORTEO MM) Mexico

Financials

Galliano's Financials Research

Mexican banks, along with other Mexican assets, have benefitted from the nearshoring theme and more recently, the investor sentiment change in favour of EM assets which also supported bank shares. Yet bank sector headwinds are emerging in the data, with rising funding costs eroding credit spreads and worsening credit quality trends implying a worsening in the credit cycle. Victor Galliano believes that Banorte’s 2Q23 results vindicate his caution on the shares, with evidence of spread pressure and rising credit costs; he prefers to gain Mexican bank exposure through BBVA (BBVA Mexico consistently extracts premium returns on equity well in excess of 20% p.a., with its healthy core capital levels not acting as a major hurdle to its high ROE).

- 04 August, 2023

LatAm Banks

Financials

Galliano's Financials Research

Victor Galliano examines key balance sheet ratios of the LatAm Banks looking into liquidity, credit quality and capital adequacy, at a time of investor nervousness and concern - Victor likes Bradesco and Bancolombia as value plays with Banco de Chile, BanBajio and BanRegio as high quality names. His bearish picks are Banorte (even though it is a quality name in terms of capital and credit quality, it is more exposed on the importance of its securities portfolio) and BCI, despite its strong liquidity, with its small US (Florida) banking subsidiary.

- 31 March, 2023

Banorte (GFNORTEO MM) Mexico

Financials

Galliano's Financials Research

Withdrawal from Banamex bidding is positive, but current valuations don't reflect 2023 risks - Victor Galliano highlights the pressure on credit spreads from rising funding costs in the system; Banorte, despite its loan to deposit ratio of 101%, has avoided this so far by improving its funding mix but this can't continue indefinitely. There are early signs that credit quality may be worsening, despite the benign NPL trends, stage 2 loans increased from 0.85% in 2Q22 to 1.09% in 3Q22. Going forward, non-bank subsidiaries may also prove harder to continue to squeeze higher returns and the investment in the digital bank adds to opex.

- 28 October, 2022

Mexican allocations continue to surge higher

Copley Fund Research

Over the past 6 months there has been some aggressive country repositioning among active EM managers - Mexico is now the largest country overweight position (vs. the benchmark iShares MSCI EM ETF). Despite this sentiment shift, Steven Holden says allocations look far from stretched (avg. weights among active EM funds: 3.4% today vs. nearly 5% in 2015). On a Style basis, Yield managers have increased weights the most. On a stock level, Grupo Financiero Banorte and Wal-Mart de Mexico have been instrumental in Mexico’s rise up the ranks.

- 28 October, 2022

LatAm Financials: Focus on the value opportunities

Financials

Galliano's Financials Research

Victor Galliano identifies the most attractive stocks based on value and GARP metrics. In Brazil, he highlights Banco do Brasil and Bradesco, but has recently turned cautious on Banco Inter. He continues to see further upside in Banorte (Mexico). Credicorp (Peru) is one to watch closely - most attractive PEG ratio among LatAm banks; plus investors have begun to cover short positions. Amongst the payment companies, Victor sees strong growth potential at PagSeguro. Within the wealth management sector he remains cautious re. XP's prospects due to eroding take rate and rising IFA costs.

- 14 May, 2021