02.11.2013
By Terry Flanagan

Mexico Disintermediated by China, Says Hedge Fund Expert

While the China boom has helped commodity producing countries, it has hurt Mexico because of its big manufacturing base for exporting goods to the U.S..

“Mexico is unlike South American countries that have benefited from the commodities boom, the catalyst of which was the growth of China’s economy based on manufacturing exports,” said Fernando Donayre, chief investment officer at Inca Investments, a Latin American investment management firm based in Miami. Inca Investments has approximately $450 million in assets under management.

“When China started building its export capabilities, it took market share from Mexico,” said Donayre. “So what helped the commodity exporting countries hurt Mexico.”

As Brazil began to garner attention from both the general public as well as investors, “Mexico became a back burner issue because it was growing at less than 2%, which is low for a developing economy”, said Donayre. “Over the last 10 years, meanwhile China became a manufacturing powerhouse because it had low wage labor rates,” he added.

That, though, has begun to change with market dynamics shifting back in Mexico’s favor.

“China’s wage base has been going up, and thus its competitive cost advantage vis-à-vis Mexico has eroded,” said Donayre. “The way to capitalize on this long-term secular trend is to invest in consumer-oriented companies in Mexico.”

Brazil, meanwhile, “is finally reaching it potential as a global capital market, and the region’s market structure offers a model for regulatory reform in the U.S. and Europe,” said Henry Chien, analyst at Tabb Group, a capital markets consultancy, in a research note.

“As participants adapt to the new financial markets regime in North America, Brazil has the inside track on the future of post-trade clearing infrastructure, and may even serve as the model for reconciling the issues of high-frequency trading with electronic markets,” said Chien.

The prevention of systemic risk, said Chien, “is at the center of the market’s core”. He added: “Here, where OTC markets are organized and a majority of transactions feature a central counterparty to the trade, is the model for reform efforts across the U.S. and Europe.”

In Brazil, regulators are weighing up whether to require the incumbent exchange, BM&FBovespa, to provide overseas competitors with access to its post-trade clearing services.

The Comissão de Valores Mobiliários, the securities market regulatory body in Brazil, last year published a study by European consulting firm Oxera on the costs and benefits of changing the competitive structure of the market for trading and post-trading services in Brazil.

The Oxera study concluded that BM&FBovespa would be likely to continue as the monopoly provider of services in Brazil, because entry by either a trading platform on its own or a trading platform with a linked central counterparty would be difficult, if not impossible, without the co-operation of Companhia Brasileira de Liquidação e Custódia, the Brazilian clearing house owned by BM&FBovespa.

From a trader’s perspective, opportunity exists in Brazil with new liquidity flows.

“As local funds dip into domestic equities or look for international offshore exposure, there will be new order flows to facilitate and arbitrage,” said Chien.

New products—from ETFs to cross-listed commodities contracts—offer sources of inefficiencies for quantitative strategies, he said. As the implementation of the Puma multi-asset electronic trading platform is completed across BM&FBovespa markets, the capacity for HFT strategies is set to expand as well.

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