US firms show no signs of halting investing in Mexico despite Donald Trump’s protectionist rhetoric, says Jupiter’s Ross Teverson, who is currently increasing exposure to Mexican firms.
Trump famously campaigned that he would build a wall along the US-Mexico border and has also threatened a 20 per cent tax on imports from the southern neighbour.
The protectionist president recently told American manufacturing company bosses said America’s trade deals are “unbelievably bad,” citing Mexico as a number one example with which the US has an “unsustainable” $70bn current deficit.
But Teverson, who manages the £73m Jupiter Global Emerging Market fund, says that not even the US president could break the “very embedded” supply chain between the two countries and says companies on both sides of the border are not threatened by Trump’s rhetoric.
Teverson, who came to Jupiter in 2014 after 15 years at Standard Life Investments, is currently head of strategy for emerging markets.
Speaking to Fund Strategy, he says: “Among companies in Mexico the management remained very level-headed and actually optimistic in the medium to long term in terms of outlook for corporates.
“I met with some people involved in the North American Free Trade Agreement negotiations and anyone who has any company who has a good understanding of the trade that takes place between the US and Mexico understands that supply chains are so integrated across the border that it is not practical even for Donald Trump to disrupt it significantly.”
The fund manager says Trump has to moderate his policies in order to obtain a majority in Congress, as demonstrated recently with his administration’s failure to replace and repeal Obamacare.
Teverson says US firms are currently set to increase their investments in Mexico, contrary to presidential photo ops that suggest Trump is convincing US manufacturers to keep factories at home.
He says: “If you look at the intentions of US firms that have investments in Mexico already, they are looking to increase that investment. Companies have realised there’s no point in letting Trump’s rhetoric having any influence in their investment decisions.
“There’s still a lot of new investments taking place in Mexico and rightly so.”
Mexican labour costs are between an eighth to a fifth of US labour costs, Teverson notes.
Within the Global Emerging Market fund there was no exposure to Mexico at the start of the year. Now Teverson has upped the exposure to 5 per cent, by adding firms such as Vesta, which develops and leases factories to multinational companies and which makes 2.5 per cent of the fund.
He says: “Over 80 per cent of revenues are in US dollars. Vesta builds and leases high quality manufacturing facilities to US and multi-national companies in Mexico.
“They’ve seen over 70 per cent of leases renewed in 2017 already, which is a high rate for this time of the year.”
The fall in valuations for Vesta between early 2016 and the start of this year is around 30 per cent.
“Given that it has been minimal fundamental change for the prospect of that business and we saw that significant de-rating of the stock, that business has become very attractive,” says Teverson.
Why should investors pick EM equities?
Emerging market equities is one of the few asset classes globally with the most attractive valuations historically, argues Teverson.
He says: “We have to say we are entering in a new territory for all the other asset classes in terms of global growth or interest rates, whereas for emerging markets buying into the asset class at between 1.6 and 1.7 times book, which is where we are now, and at around 12 and a half time earnings, that is a very reasonable valuation.
“If we see companies deliver on earnings growth I think there is a lot of scope for emerging market equities to have another good year after a strong year in 2016.”
For UK investors, Teverson says they should not be put off by the fact that opportunities have been missed by the very high sterling returns last year as “there is still a lot to go for the asset class”.
He says: “The sterling return from emerging market equities last year was 33 per cent and some people questioned if that can be repeated. A lot of the returns were positive because of weak sterling. In dollar terms it is good but not amazing, they were up 12 per cent in dollar terms.
“At the same time we saw earnings growth so that is why if you look at valuations today they aren’t much higher than at the start of 2016.”
Frontier markets not correlated
The Jupiter Global Emerging Markets fund is a concentrated unconstrained portfolio of 48 holdings with a bottom up views but has a very wide geographical diversification.
Teverson says: “Even though we are quite concentrated portfolio, the geographical diversification within the fund is greater than that of the benchmark itself.
“For example, we have a lower concentration in China than the benchmark, while it is the largest concentration of the benchmark.”
The fund also has a higher exposure to frontier markets than the index, such as to Kenya, Nigeria, Georgia, Romania.
The manager says: “We think that having that frontier exposures brings a number of things to the fund. It offers some great stock picking opportunities in those markets, with companies not well researched.
“You have often structural growth in those markets with less mature economies and at the same time those are quite lower correlated with emerging markets as a whole and that helps us improve the risk reward proposition of the fund.”
Teverson manages the Jupiter China Fund and the Global Emerging Markets Fund (Unit Trusts) as well as the China Select fund and the Global Emerging Markets Equity Unconstrained fund (Sicavs).