Making Investment Decisions in Mexico During an Election Year

Local and international companies currently evaluating and defining their investment plans in Mexico must grapple with additional uncertainty in their business plan assumptions during a presidential election year. Although current polls favor the continuity of the ruling party, each new government introduces its own political and economic agenda or at a minimum an adjustment to existing policies that can potentially impact businesses. 

Considering different macroeconomic and regulatory scenarios, and their potential impact on a business plan, represents a significant challenge. Understanding the political landscape and its potential fluctuations becomes a critical aspect of strategic planning and investment decision-making in such a dynamic environment.

Historically, during electoral periods in Latin America, local and foreign companies tend to postpone decisions or reduce their investment amounts to focus on clear short-term payout. This is due to the changes driven and the populist discourse of some of the candidates during their campaigns, as well as the marked ideological differences and polarization between the main parties — all factors that can significantly impact investment return expectations.

During the last 22 free presidential elections in the region, the incumbent administration has lost 20 times to the opposition. This frequent change in leadership has brought an additional challenge for investors, especially those with long-term projects extending beyond the duration of a single presidential term. The need for a longer timeline to achieve the desired impact and return on their investments is heightened in such a politically dynamic environment.

In a 2019 conversation with CNBC, Warren Buffett, the famed chairman and CEO of Berkshire Hathaway, offered a contrasting perspective on this issue. Buffett advised that “politics has no place in the realm of investing,” urging investors not to let political views unduly influence their investment strategies. Despite the historical trends and political changes globally, Buffett’s advice highlights the importance of maintaining a clear distinction between political developments and investment decisions. He stressed the need for investors to resist the temptation of allowing personal political views to influence their investment strategies, suggesting a focus on the intrinsic value and long-term potential of investments, irrespective of the current political landscape.

Despite the electoral uncertainties, Mexico offers unique investment opportunities, particularly through the phenomenon of nearshoring. The country’s strategic geographic location, sharing a land border and shipping infrastructure with the United States, helps minimize the impact of supply chain issues, such as drought affecting the Panama Canal or shipping vessels being subjected to attacks in the Red Sea. Therefore, despite election-related uncertainty, many manufacturing businesses have few options if they need to have resilient supply chains. Being away from global crises and geopolitical tensions while being very close to the United States positions Mexico as an attractive destination for companies looking to relocate their supply chains closer to their end markets. This approach is relevant at times when trade tensions and logistical challenges have led many companies, including Chinese and European groups, to consider relocating plants or adding new capacity in Mexico to serve customers based in the United States.

Additionally, Mexico benefits from stable trade agreements, such as the USMCA (United States-Mexico-Canada Agreement), providing a favorable legal and commercial framework for nearshoring operations. Geographical proximity to the United States reduces transportation and logistics costs, facilitating the integration of supply chains and improving responsiveness to market demands.

During the first nine months of 2023, foreign direct investment reached almost US$33 billion(1) and numerous multibillion-dollar investments have been announced by major companies, such as Tesla (US$5 billion plant planned), which in turn attract further commitments from suppliers.  During the first four years of the López Obrador administration, US imports from Mexico amounted to US$459 billion(2) in 2022, up 31.5% since 2018, further evidencing the attractiveness of Mexico as an export platform. 

The strength of nearshoring in Mexico contributes to a promising economic outlook for 2024, although there are factors to consider that could influence its performance. The current administration has forecast economic growth of 3.5% for 2024, supported by the strength of private consumption, higher levels of public and private investment, and an increase in the country's productive capacity. The Bank of Mexico shares a similar forecast, albeit slightly more conservative, with growth expectations of 3.1% - 3.3%.

The presidential elections in Mexico are particularly relevant for Latin America this year and could mark a significant step for gender equality if the country elects its first female president.

There are concerns about a possible economic slowdown. Experts indicate that, although the first half of the year is expected to continue a positive growth trajectory, the end of 2024 could be more challenging due to external factors, mainly US presidential elections and the possibility of an economic slowdown in the United States. The elections in the US are generating additional uncertainty, considering that it is the largest international investor in Mexico and the destination for most of its exports. Political discourse in the United States  focusing on immigration issues and the trade relationship with Mexico may create volatility even if the eventual policies implemented by the next US administration are likely to be more pragmatic.

Currently, the overall outlook on Mexico is quite optimistic. With the impending change in the presidency, the new leadership must focus on maximizing the country's potential for the benefit of its economy and population. The ability of the incoming administration to realize this potential will be decisive in determining Mexico's economic progress and stability in the coming years.

References:

1. INEGI

2. Trading Economics