Credit Suisse sticks by overweight on Mexican stocks, peso weakness overdone

Credit Suisse stuck to its overweight recommendation on Mexican equities on Thursday, despite the country´s currency having recently behaved like one of the "more fragile emerging market economies".

The Swiss broker retained its 5% overweight stance on the North American country´s equities, as measured by the MSCI Mexico, telling investors its econometric models pointed to scope for 14% upside in the benchmark when measured in US dollar terms and listed six reasons why it believed selling in the peso was "overdone".

Those reasons were:

1. Mexico's modest basic balance deficit is typically well covered by bond portfolio flows.

2. Relative inflation dynamics remain relatively benign and supportive of stable FX.

3. Mexico's global export market share is growing as aggregate EM's is shrinking.

4. Mexico's manufacturing labour costs are now competitive versus China's.

5. Mexico's economic growth differential versus GEM ex China is FX supportive.

6. The peso's deviation from PPP is the greatest since 1996 and more than overall EM.

Since the middle of 2014, MSCI Mexico had outperformed MSCI Emerging Markets by 12% in local currency terms but underperformed by a marginal 2% in US dollar terms.

However, in parallel the peso had weakened by 26% versus the Greenback, in comparison to a 15% drop in the overall MSCI EM capitalisation-weighted basket of currencies (19% if the Chinese yuan was excluded).

Analysts Alexander Redman and Arun Sai pointed out the peso´s place as the 8th most liquid emerging market currency globally.

That, they believed, made it susceptible to being used as a 'proxy' for emerging market risk, with the peso "acting as a barometer for overall discontent affecting broader EM rather than representative of Mexico's macroeconomic prospects in particular."