The weak peso is great for U.S. and European tourists, for example, who don't live in Mexico and want to vacation there. But for Mexican citizens, not so much.
Mexican airports and tourism operators are fast becoming a hotspot for investors betting they will escape the trade-related worries that have squeezed some other assets there, with lingering weakness in the peso seen providing further upside.
While the Mexican currency has gained some 17 percent against the dollar since the inauguration of Donald Trump as U.S. president in January, fund managers say the currency is still undervalued even as it moves below 19 pesos per dollar.
That means that Mexico – long a reasonably priced destination for Americans – remains cheap, potentially further boosting a strong inflow of tourists.
The number of international tourists in Mexico climbed nine percent to 35 million in 2016, a year in which the dollar gained around 20 percent against the peso, according to Mexican Tourism Ministry figures.
A January OECD report linked the growth to “sharp depreciation of the Mexican peso,” which had “improved the price competitiveness of tourism exports in Mexico’s main source markets, particularly in the important U.S. market.”
Moody’s Investors Service said in a report late last year that it expected further growth in 2017, thanks to a reduction in fuel prices, a strong dollar and increased competition among airlines.
A continued tourism upswing could benefit Grupo Posadas, a Mexican hotel operator, as well as Grupo Aeroportuario del Pacifico, a holding company that operates international airports in the Pacific and Central regions of Mexico and in Jamaica, both of whose bonds Aberdeen Asset Management‘s emerging market debt fund owns.
“For American tourists … it’s cheaper for them to go on holiday now and we don’t think Trump’s policies are going to prevent the marginal person in the U.S. from going on holiday in Cancun,” said Kathy Collins, Aberdeen’s emerging market debt investment manager.
Loomis Sayles‘ emerging markets co-portfolio manager Eddy Sternberg is also betting on Grupo Posadas, part of the firm’s overweight position in Mexican corporate debt, noting that “with all the Mexican peso depreciation, tourism is doing fabulously.”
Grupo Posadas’ dollar-denominated bonds maturing in 2022 have seen their yields drop 111 basis points since the U.S. inauguration and their spread over comparable U.S. Treasuries compress 85 basis points during that time.
Aberdeen’s Collins favored the tourism sector over others like industrial real estate that she believes could be more affected by Mexican and U.S. political developments.
Similarly, Loomis Sayles’ Sternberg recently reduced his holdings of Mexican banks because of how exposed they were to Mexico’s domestic economy.
Of course, foreign demand is not the only factor contributing to strength in Mexican travel and tourism.
Aaron Visse, who co-manages asset management firm Salient’s Dividend Signal Strategy portfolios, which focus on emerging market infrastructure investments, said population growth and the emergence of a middle class in Mexico had encouraged him to buy stock in airports, including Grupo Aeroportuario del Sureste and Grupo Aeroportuario del Pacifico.
Both companies were privatized in the late 1990s and early 2000s as part of a plan to put the airport industry, which operates based on long-term concessions handed out by the government, in the hands of private enterprise.
ASR’s American depositary receipts have surged 150 percent over the past five years compared with 67 percent for the benchmark S&P 500 equity index. Meanwhile, Grupo Aeroportuario del Pacifico has more than quadrupled over the same period, far outpacing the 22 percent gain in Mexico’s benchmark IPC index during the same period.
“These things have been really compelling long-term, total return stories and I think they’re really exciting assets in markets like Mexico and others where you’re going to continue to see population growth and more emergence of a middle class,” Visse said.
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Photo Credit: Analysts expect 2017 to be another healthy year for Mexico's tourism industry. Pictured is an American tourist in Cancun, Mexico. Predi / Flickr