Chart Of The Week   February 08 2023

Bet On Mexican Banks

BCA Research’s Emerging Markets Strategy service recommends investors go long Mexican bank stocks / short Brazilian banks, currency unhedged.

Bank stocks have been the strongest performers in the Mexican bourse over the past 12 months, and the team believes that this outperformance will continue.

  • The negative impact of higher interest rates will be milder in the Mexican economy than in the Brazilian one. The rationale is that private sector leverage and debt servicing costs are considerably low in Mexico but high in Brazil. Consequently, bank loan impairments will continue to rise in Brazil, but will remain contained at low levels in Mexico. Importantly, Mexican banks have much more provisions than Brazilian banks. In brief, the credit cycle favors Mexican banks versus their Brazilian counterparts.
  • The public sector's debt is also much higher in Brazil (86% of GDP) than in Mexico (44% of GDP). The implication is that the Banco Central do Brasil will be reluctant to cut interest rates even if inflation drops significantly and the economy is weak. On the contrary, Banxico does not have to worry about lax/unsustainable fiscal policy and will be proactively cutting interest rates when warranted.
  • Finally, even though Mexican banks are trading at a large valuation premium to their Brazilian peers based on the trailing P/E and price-to-book value ratios, this valuation premium is justified by a better outlook.