Rodrigo Echagaray: Good morning, everyone. My name is Rodrigo Echagaray, and I am the Head of LatAm Equity Research at Scotiabank. Thank you all for joining. We have quite a bit of content to get through today and many moving parts on the macro and the political side. Yet we continue to believe in some version of nearshoring – in a continuation of the USMCA – and therefore see opportunities in certain sectors of the economy and the markets.
We will first hear from Rodolfo Mitchell on all things macro. He will also talk about tariffs. We will then hear from Ricardo Bravo on fixed income strategy. We’ll pass it on to Hugo Ste-Marie who will discuss why he’s still optimistic on Mexican equities. Francisco Suarez will then talk about industrial real estate and nearshoring. And we’ll finish up our conversation with Felipe Ucros, who will go in depth on the state of the Mexican consumer. We will try to keep it tight to have plenty of time for Q&A at the end.
And you can submit your questions through the platform. There is a box where it says questions and answers. Please submit your questions through the chat and through the platform, and we’ll do our best to get to all of them.
And with that, let’s jump right in. Rodolfo, over to you.
Rodolfo Mitchell: Thank you, Rodrigo, and hello. Good morning, everybody. It’s a pleasure to be here with you today. Let me walk you through the current state of Mexico’s economy and what lies ahead.
Mexico has experienced an economic slowdown since the second half of last year, driven by rising economic and political uncertainty.
As a result, we have seen a decline in the industrial sector, while the services sector has remained resilient, helping to sustain economic growth. However, signs of deterioration are beginning to emerge in services as well, due to a decline in formal employment and a contraction in remittances, largely influenced by U.S. migration policy.
The contraction in industrial activity is mainly explained by two factors. First, a slowdown in construction following the conclusion of infrastructure projects from the previous administration, and a decline in oil production by Pemex.
Meanwhile, the manufacturing sector remains stagnant, with diverse dynamics across industries, in which those with greater exposure to external sectors are showing the most progress. In this regard, it’s worth noting that Mexico’s manufacturing sector has benefited from North America trade integration since 1995. Even though Mexico is currently in a less favorable position in terms of tariffs compared to previous years, it still holds an advantage over other U.S. trade partners thanks to the USMCA. Here, around 83% of Mexican exports to the U.S. comply with the agreement, keeping our effective tariff rate around 5% – a level lower than that of many other countries.
This North America trade integration has led to an increase in foreign direct investments. However, most of these flows have been concentrated in profit reinvestments, greenfield investments, rather than in new investments.
On the monetary side, thanks to Banxico’s hawkish stance, inflation has been declining since 2023. In response, Banco de Mexico began an aggressive easing cycle in 2024, cutting rates by 325 basis points. Nonetheless, inflation remains above the 3% target, and Banxico must maintain a restrictive monetary stance.
As such, we expect limited room for further rate cuts, with our terminal rate for 2025 projected at 7.5%.
Finally, it’s worth mentioning that the 10% year-to-date appreciation of the peso against the U.S. dollar is mainly due to dollar weakness rather than a strong peso.
And with this, I would like to pass the mic to Ricardo. Thank you.
Ricardo Bravo: Hi, good morning, everyone. Thanks Rodolfo. Thank you for joining. I will start with the fixed income and FX view. In that sense, I want to say that given the current macroeconomic landscape, we believe that the environment for local fixed income remains constructive. Our outlook is supported by the Banxico’s ongoing monetary easing, the gradual convergence of inflation towards central bank targets, and also a slowdown in economic activity. That being said, we remain mindful of several risks facing the Mexican economy, among them the concerns around fiscal discipline, the uncertainty under the USMCA renegotiation and subdued growth prospects for 2026 and beyond due to limited private and public investments.
One external risk I also would like to highlight is the potential refinancing pressure on the U.S. government debt. Given the current debt profile, we anticipate a steep yield curve in the U.S., which could also affect or impact Mexican rates through global market dynamics. For the monetary policy perspective, market pricing currently reflects a terminal rate for Banco de Mexico easing cycle between 7.25 and 7.50%.
In our view, this may be overly conservative especially considering the softening growth outlook that we have seen. As a result, we see value across various fixed income asset classes, and I will start on the Mbonos. We maintain this constructive stance on the bonds maturing between two and seven years, which I will believe that the five-year tenure is standing out as a particularly attractive point. This trade offers a well-balanced exposure benefiting from Banxico’s easing while having limited sensitivity towards long-term fiscal and global risks.
From a relative value perspective, we continue to favor nominal rates, we could say that MBONOS over inflation links, or UDIBONOS, because break-even inflations have widened particularly on the long end of the curve. This has been driven by the sustained demand from pension funds and from insurances, and this dynamic has made the UDIBONOS relatively expensive and less appealing compared to other instruments.
In terms of valuations, CETES with maturities of six months and longer present compelling upside potential as current rates remain misaligned with the expected path of monetary policy. However, we acknowledge that the increased issuance from both the Ministry of Finance and Banco de Mexico could also possess short-term supply headwinds in that regard.
Turning to the fixed market, the Mexican peso has outperformed regional peers and also emerging market peers, supported by the stable macroeconomic and political backdrop as well as favorable external conditions. Nonetheless, on the medium- to long-term risk such as the fiscal sustainability and the trade uncertainty, this could challenge the currency of resilience. Despite its trends to weaken driven [by] the structural risk, as I said before, they are not fully priced into the market dynamics and that being said, we recognize that the Mexican peso remains as a top-performing currency in Latin America alongside with the Brazilian real, while other currencies have faced volatility due to electoral cycles, fiscal concerns, and Mexico has maintained a relatively stable macroeconomic backdrop and also a political environment which has led to an anchor on investor confidence in the Mexican peso. And that being said, I will end my remarks over here, and I will pass the microphone to Hugo.
Hugo Ste-Marie: Thanks Ricardo. When you listen to my colleagues talk about the Mexican economy, it certainly sounds uninspiring, and you might think Mexican equities are not performing too well. I’d say to the contrary; Mexican stocks are on fire this year. The Bolsa has gained something like 16% in local currency. The index stands near its two-year high at around 58,000. When you look at the MSCI Mexico in U.S. dollar terms, it has delivered an even better performance, rising a massive 28%, again on a year-to-date basis.
On equity markets, there’s some good news. The good news that we believe there’s probably more upside ahead and Mexico overall with an EM mandate certainly deserves a small overweight rating. Mexico accounts for about 2% of the MSCI EM. So being overweight Mexico is not a tall order in my opinion. It’s not too demanding.
Why do we think Mexico deserves a small overweight recommendation as we speak? I see two main reasons. Reason #1: clearly the market is not the economy. Earnings growth is rising at a much, much faster pace than domestic economic growth. Why? Because most stocks in the MSCI Mexico, when you look under the hood, it derives a large percentage of the revenues outside of Mexico. So, U.S. and world growth is very important for the benchmark.
On the earnings front, we’re seeing positive earnings revisions. The MSCI Mexico 12-month-forward EPS has been revised up 7% in the last three months, which is much better than its regional peers. And I would say more importantly, it’s better than the MSCI emerging market.
In terms of earnings growth over the next 12 months, consensus is looking for about a 10% increase. As I mentioned, that’s far exceeding domestic economic activity, which is quite anemic for sure. On a relative basis, I would say Mexico boasts superior earnings momentum relative to its EM peers. And this is where it’s extremely important. You might say, what does relative earnings momentum mean? That’s a good question. Stay with me for a second.
If you take the MSCI Mexico 12-month-forward EPS and you divide it by the MSCI EM 12-month-forward EPS, you get a ratio. When this ratio goes up in favor of Mexico, it means that Mexico has more earnings momentum than EM stocks. And that’s a reason why it should outperform. We have started to see that in the last few months, it’s just starting. But if this trend extends in coming months, I think Mexico could certainly beat and outperform the MSCI emerging market. So, the earnings story is positive in my opinion because the market is not the economy.
Reason #2 is valuation. When you look at absolute valuation, relative valuation – both are appealing. On a standalone basis, Mexico was trading at 10 times forward earnings at the start of the year. It’s trading at around 12 times today, but 12 times is still below the 10-year average of around 13 1/2 times. So, there’s room for further P/E expansion, especially if the central bank keeps cutting its benchmark rate in the coming year, as we expect. We have below-average valuation across the board. When you look at the MSCI Mexico, it’s not just one or two sectors; all of them are trading below their long-run average, so there’s room across the board to see multiple expansion.
Furthermore, I would note that if you looked at CDS spreads, they’re tight and they would argue for a higher P/E ratio in my opinion, maybe closer to 13, maybe even 14 times versus 12 now. Again, so that supports our call. And lastly, I would say another catalyst for P/E expansion could be lower trade uncertainty. Listen, I will not try to predict what Mr. Trump will do tomorrow. It’s extremely difficult if not impossible. But clearly what we’ve seen in the last few weeks, most countries have reached deals with the U.S.; we got a 90-day extension between Mexico and the U.S. for further trade talks. If we have a trade agreement coming in the next few weeks, maybe next couple of months, that will clearly remove a lot of uncertainty on the economy, and that might come with P/E expansion as well. So that’s on an absolute basis.
When you compare Mexico valuation versus EM stocks, Mexico now at 12 times, it’s trading below the MSCI emerging market at around 13 times. So, Mexico’s trading at a discount. We have rarely seen that happening in the last 20 something years. So, it bodes well on that front as well. And when you compare obviously Mexico versus the S&P 500, it’s dirt cheap. The U.S. benchmark is trading at 22 times, Mexico at around 12, so it’s almost a 50% discount on a relative basis. So, I would say in conclusion, we see some economic and political challenges, but keep in mind the market is not economy. Under the hood, we have an index, the MSCI Mexico, which is highly dependent on global growth, and we believe Mexico deserve a small overweight recommendation within an overall MSCI EM mandate. So, I will conclude my remarks there, and I will now pass it over to Francisco.
Francisco Suarez: Thank you, Hugo. My name is Francisco Suarez, and I cover Mexican real estate, Mexican airport operators, toll roads, as well, and cement and construction in Latin America. So, you probably might have heard about me writing about nearshoring, and the reason why is because part of my coverage is really in the middle of the nearshoring phenomenon.
So, our thesis that we have now is that location and Mexico’s cost advantages that are structural in nature are no longer enough for the next phase of what we call friendshoring. It is about trying to align to geopolitical values that are valuable for the entire bloc of North America. So, think about things like immigration for sure, things like energy security for sure. And we lever a lot on two very interesting documents that were published by the IMF and Economist Impact. We put those links, and we suggest for you to get a nice view on those documents because, at the end of the day, the findings are the following. There’s a huge correlation between cross-border flows from institutional investors and how geopolitically aligned are those countries. So, the more geopolitically aligned that Mexico might be, the more chances that Mexico could receive those inflows from institutional investors. There’s another leg now going to Mexican real estate, [which] as I was trying to explain is in the middle of this phenomenon, nearshoring.
If we as a country are able to negotiate under the next USMCA, not only taking advantage of the obvious location advantages and the cost advantages that Mexico has, but to make sure that Mexico is a reliable partner to those geopolitical ends, we think that certain investments related with, for instance, the leadership on and the fight on the global leadership on artificial intelligence.
And the investments that Mexico has, the opportunity it has, to help to create those value chains that are literally not existent in North America – that could be material for a demand of industrial real estate. So, with that in mind, we think that as long as Mexico goes a step ahead and aligns their values within the new USMCA, we strongly believe that the amount of inflows will result once again in a major net absorption that will be outpacing the supply of demand. And with that, rent growth will continue to go up.
Why that is important? Because the sector has degraded from those days where we thought that nearshoring was a permanent thing, and now we have seen a discount. Companies like Fibra Prologis issuing equity at 1.25 book value. Now it’s trading perhaps shy of 20% of book value, and despite the fact that the company continues to benefit on huge lease spreads as there is a huge difference between market rents and in-place rents. And this is very interesting because all of a sudden, we see the potential of rerating once we have clarity on these matters, and the potential we see ranges between 20% to up to 40% as a major opportunity.
I will finish up with other companies that I cover in my in my sectors is basically about Mexican airport operators. Some of them are starting to invest in the United States and looking up to other opportunities abroad. We also think that at the end of the day if the next phase of the USMCA – if friendshoring doesn’t materialise – may create incentives for Mexican companies to invest abroad.
So, with that, let me pass the mic to Felipe to discuss Consumer.
Felipe Ucros: Thanks, Paco. Good morning, and thanks to everyone for being here. I’m Felipe Ucros, the LatAm food and beverage analyst. Our team worked on this piece, “The State of the Mexican Consumer,” along with the retail team headed by Hector Maya. So, thanks, Hector. We’ve been clearly going through a rough batch of results in our coverage universe. We’ve seen some food and beverage companies that are typically defensive reporting volumes that are down 5% to 10%, which is quite a significant contraction versus what we usually see from them. On the retail side, it’s been similar. We’ve seen traffic drops in the mid-single digits. So that obviously prompted the question for this report, which is, is the Mexican consumer falling off a cliff or are there other factors at play recently? And perhaps more important, are those factors more influential in results recently and are they temporary?
And I’ll get a little bit ahead of myself here and conclude that, yes, the consumer is suffering, and things are slowing down, but other exogenous factors have mattered about as much or more in recent quarters. Those exogenous factors do tend to be temporary in nature. So, we are fairly confident that once we’re past those, results will improve, even if consumption has slowed down a little. So, we went through the exogenous factors, and what are the exogenous factors? We had some calendar effects. We have tariffs and immigration controls from the U.S. We had weather, which was perhaps the most important one of them, and we had tough comps as well. So, we’ll go through them and explain what we think are the impacts and how temporary they are.
The first one, calendar effects: Easter shifted from the first quarter in 2024 to the second one in 2025, and that threw a lot of noise specifically for retailers more than for food and beverage companies. So, what we did was normalize for this by looking at the six-month-to-six-month comparison. And if you look at that, you have mid-single-digit growth rates of retailers which are not terrible by any means. You also had presidential elections in 2024. It’s hard to measure how much consumption goes up when this happens, but we do know it does happen.
And obviously, the following year, you have tough comps to follow. We know that’s not going to be there since the second half of this year. So, we were fairly confident that it’s temporary and the comp is going to improve on the calendar side.
On tariffs and immigration, tariffs haven’t hit our coverage too hard directly, but immigration policies in the U.S. are changing Latino immigrant consumer behavior in the U.S. And while that’s not the focus of this report, it is impacting remittances.
And remittances have been slowing down significantly, and that poses the question of what that does to our companies. In the report, we posted some graphs on this, but essentially, we’ve seen remittances behave like this several times over the last 10 years, and it hasn’t directly translated into an impact on publicly traded consumption companies. That’s different than the full economy, as Hugo was mentioning.
The third factor, perhaps the most important one, the last few quarters was weather. Rain in June was the rainiest month in Mexico in the last 50 years. If you’ve ever needed milk and looked out the window, saw that it was pouring, and thought “Well, I don’t need milk that badly,” well that’s pretty much what happened during the quarter. But the problem is that weather is often used by our companies to explain results, and that means that markets don’t immediately give them credit for it. So, what we did is we examined the eight different data cuts that we could find to confirm how bad things were. And I won’t go through all of them, but I’ll give you a few examples. When you look at food versus beverages, food grew volumes by 1%, beverages plunged by about 4 or 5%. So huge difference when typically, they behave the same tells you that weather probably had a factor in here. Also, categories of retailer – retailers confirmed that their beverage and ice cream categories, the ones that suffered during rain, were the worst-performing categories, especially when you look at one-way consumption packages that also altered the frequency and the size of purchases. And lastly, you can look at the timing of events. Companies were kind enough to provide their monthly numbers, not just their quarterly numbers to prove what was happening. And if you look at it, because it didn’t rain evenly during the quarter and it was very concentrated in June, you’ll see that, for example, in beverage companies, their June numbers plummeted in the double digits, sometimes deep in the double digits.
That didn’t happen to the food companies. Also, June was a lot better than May and April. So, it confirms the weather theory and that it was very impactful indeed. And lastly, it’s also the comps that are compounding this effect because last year it was also unusually hot. So, the weather hits you on both ends of the equation.
Now, as Hugo mentioned, the stock market is not the economy, and not only are his points completely valid also, when you look at our companies and the Mexican segments of the economy, they tend to have incredibly high moats. Many of them have market shares about 50%, some of them reaching the 80% level and above in Mexico. And that has meant that they tend to outperform the economy. They’re incredibly resistant. If you look at Mexican divisions of publicly traded retailers, they tend to consistently outperform nominal GDP by about 5 percentage points. If you look at the equivalent, but for food and beverage companies, they tend to perform about 2 to 3 percentage points above nominal GDP. That implies that if the economy is going to slow down to about 4 or 5%, you’re going to see food and beverage and retailers still getting in the mid- to high single digits. Perhaps if they have a little bit of margin tailwind and some repurchases, you can get to the double-digit returns on those companies.
So, the conclusion is things are not falling off a cliff at all. We’re actually seeing only a mild deceleration from the consumption standpoint. And there’s not a lot in LatAm that looks better anyways.
With that, I’ll hand it back to Rodrigo.
Rodrigo Echagaray: Thanks, Felipe, and thanks everyone for your comments. There’s lots to digest. I’m going to start with a question from the chat and just a reminder to submit your questions through the platform, if you will.
Can Mexico remain competitive for FDI without broader supply chains or policy reforms, especially now that manufacturing unit labor costs are climbing faster than in competing Asian economies?
I don’t know who wants to take that, lots of moving parts. Maybe Paco from a nearshoring perspective and some of the analysis you’ve done in the past on unit level costs, you can chime in; or maybe Rodolfo, you may also have a view on that.
Francisco Suarez: What I can see on the benefits that Mexico has on labor, those are amazing, still. Talking about lab manufacturing alone, we still see levels that are very competitive despite the fact of the increases in wages and whatever you can think of. So, the bottom line is that I don’t see that as a major issue from my end, to be competitive.
Rodrigo Echagaray: Rodolfo, I don’t know if maybe from a macro perspective, where are we with real wages? Are they putting pressure on inflation? Are you seeing anything on the macro side to suggest that perhaps manufacturing productivity or competitiveness relative to other nations is dropping in Mexico?
Rodolfo Mitchell: No, I agree with Francisco. I don’t see as a problem, so far, the increase on wages. We are still competitive against our partners here in North America; we’re competitive against Canada or the U.S., so, I still see an advantage on that side, Mexican workers and, yeah, in salaries.
Rodrigo Echagaray: And maybe let’s just stay with you, Rodolfo, from the macro side. A question on inflation. There’s been a recent pickup despite the weakness in the economy. What do you make of this?
Rodolfo Mitchell: I think what we have seen is that core prices are still above Banxico’s target, and they are still around 4.3%, and this has to do with the consumer side of the economy. Consumption has been one of the main boosters of the economy, and in that sense, there is some pressure to maintain goods and services. We have seen a spike on goods prices lately from 3% on prices to 4%, 4.1%, and I think that’s because of the strong demand in terms of consumption. I think this is one of the main reasons. The other thing is that if you compare the change rate one year ago and now, we have seen a depreciation of the peso, so also a pass-through in prices and it’s affecting the goods component of core prices. And I think that’s the main reason why we are seeing a pickup in prices lately.
Rodrigo Echagaray: Thanks Rodolfo. We have a question. Unfortunately, we don’t have the TMT analyst, but Hugo has done some work on this. So maybe you can take this from a global perspective and some of the trends you’re seeing in North America.
“What are we seeing in terms of AI and data centers?” In this case, the question refers to a data center in Queretaro. But I think broadly speaking, obviously data centers have been a lift for the overall economy here. Hugo, I think you you’ve done some work on this maybe around North America.
Hugo Ste-Marie: Especially in the U.S., we’ve seen construction spending on data centers going up almost exponentially. We talked about it in a small research note a couple days ago.
When you looked at data centres again, companies are spending quite a lot. That suggests that the demand for AI and AI themes will remain quite strong. That’s a boost as well for energy demand. So, from that side, we’re overweight the utility sector in the U.S. mainly because of this; it is going to boost demand for quite some time. And when you look at the AI story, clearly in the Q2 reporting season, the Mag 7 essentially crush estimates. When we entered the Q2 reporting season, think the Mag 7 earnings growth was expected to come in at around 15, 16% on a year-over-year basis. NVIDIA has not reported yet, but based on numbers we’ve seen so far, the earnings growth is closer to 27%. So, there’s still strong growth there. We have a slight overweight on tech and communication in the U.S.
Rodrigo Echagaray: Thanks, Hugo. And then there’s a question on the financial sector, banking sector in Mexico. And I guess maybe the way we can go about this is to look at loan and credit growth. I don’t know, Rodolfo, if you’re seeing at the macro level signs of NPLs going up, credits, credits slowing down. Any thoughts on that front?
Rodolfo Mitchell: What we have seen is that credit is still growing at a normal pace. What we have seen lately is, for instance, credit to automobiles or credit to housing is decreasing a little bit since there is a shift between consumers and they are not willing to take durable goods or to invest in durable goods. So, we have seen a slowdown in that sense, while consumer credit is still growing normally, with normal rates. That’s what we have seen.
Rodrigo Echagaray: Thanks, Rodolfo, and this one for you, Ricardo. On the FX side, I mean the peso has been surprisingly strong. You know, other EM currencies as well. But just given the tariff noise and everything that’s happening, you know, what do you make of that?
Ricardo Bravo: Yeah. Just as Rodolfo said before, basically what we have seen on the Mexican peso spectrum, it’s basically explained by the U.S.-dollar weakness. I have to highlight that in terms of what we have seen on the volatility side, we have seen a pretty resilient Mexican peso. And I believe that most of it is basically because it’s one of the clearest stories in the EM spectrum. As I said before, there is some political cycles, some fiscal noise on Latin America specifically. And also I have to say that one of the things that I believe that Mexican peso has been pretty resilient with is the noise around foreign holdings for the Mexican debt has been subdued for the past couple of months or even years, and I also believe that it’s also been one of the things that has been helping Mexican peso to face volatility on that regard.
But definitely, as Hugo said before, it’s really hard to predict what Donald Trump is going to do. It’s really hard to somehow forecast all these kinds of variables. But Mexican peso has been pretty resilient on that side.
Rodrigo Echagaray: Thanks, Ricardo.
Ricardo Bravo: Just also adding a little bit on that in terms of the trade, on trade also Mexican pesos benefiting from the USMCA agreement, and that’s also bringing the effective rate to a lower compared to other even developed countries. And it’s also one of the many things that has also been helping the Mexican peso, or at least supporting the Mexican peso, in terms of this trend that we have seen all over the world.
Rodrigo Echagaray: At the end of the day, it’s a relative game. And I think the impact on the effective tariff year-to-date is around 4%, which is higher than it was before – it used to be close to 0 – but definitely lower than what other economies around the world are paying. So, this relative game still benefits Mexico at the margin it seems.
Felipe, going back to you, there is a question on something you mentioned earlier, which is the change in behavior of Hispanics or perhaps Mexicans living in the U.S. and how this is impacting your companies. And one of the things that I found interesting from this report is that there is at least 10 companies in the index, in the Mexbol, that have more then 50% of revenues coming from outside of Mexico. So, to Hugo’s point, this index is definitely very diversified from that perspective. Can you touch a little bit more on what specifically are those changing behaviors and also maybe tied in with how important are remittances for the consumer in Mexico, which is historically perceived as being extremely important?
Felipe Ucros: So very important point there. We’ve seen a number of companies not just in Mexico – Mexican companies that have operations in the U.S. and are seeing changes in consumption but also in purely U.S.-based companies that sometimes sell in formats that cater to the Latin American consumer. And what the companies have been saying is that when they sell products through channels that are Latino oriented – that tends to happen in the south and southwest mostly – they’ve seen a sharp decrease in traffic and a drastic change in the brands that consumers are picking up. And that is completely changing the dynamics on consumption for Latino tailored products. The other thing that’s happening is that because a portion of Latino immigrants are feeling a pinch in their income, that’s what’s presumably taking a toll on remittances, which traditionally have been very important.
For Mexico, when you measure remittances as percentage of GDP, Central American countries and Mexico tend to be the ones that have the most importance in this. And obviously consumers rely on those remittances for their consumption. So, you see small drops often and when that happens, you don’t see a very sharp correlation with consumption and publicly traded companies, but you do see it in consumption as a whole in Mexico, especially if those drops in remittances are prolonged. So, there’s a difference from a fall of a few months versus a fall of a year or two years, and that’s when we would really start seeing a much deeper impact on consumption.
Rodrigo Echagaray: Very clear. And Francisco, back to you, industrial real estate has historically been perceived as very much related to nearshoring trends as you explained. Can you help us understand where are we coming from? I guess the question is more related to how much has growth in this specific sector slowed down perhaps in GLA or in rents? And where could we go if this thesis of friend shoring and the USMCA negotiations go in the right direction?
Francisco Suarez: Basically, we’re talking about an industry that before the period where we saw the benefit on the industry of nearshoring, the rent growth was minimal over the period from 2013 to 2018. But after that when we saw the evidence of huge movements and relocation of new value chains into Mexico, then we saw a huge deficit between how much GLA was put in the market and how much GLA was demanded. Before this happened, a lot of the industry players, what [they] were trying to do was putting releases or build-to-suit projects rather than build spec properties. And now what we have seen is that the size of the spec properties has increased a lot. That means that the overall expectation of that vacant space put in the market will be filled really soon. So, with that, the bottom line here is that we are seeing weaker rent growth in places like Ciudad Juarez for sure. We are seeing perhaps getting to double-digit declines in rents. But if you think about where we’re coming from, the rents are still 50% above. So, in this incredible sort of bear market, you see companies reporting changes in net effective rents above 60% upon renewal, and many companies – for instance Fibra Uno is guiding for rent growth; because of the difference between market rents and the levels of the rents that the leases are currently now, they are pointing to levels of 31% of increases. So regardless of the slowdown on the net absorption on new vacant space, at the end of the day, the difference between rent growth will continue to fuel FFO for all these companies. And just let me end with the following. There are two markets that are totally sold out where dynamics hasn’t been impacted at all by the uncertainties related with trade, and those are Mexico City and Guadalajara. So, clearly, the bulk of the pressure has been concentrated more in border markets. Now we are seeing vacancies increase in those markets. But still the companies that we cover will continue to benefit from this rent growth.
Rodrigo Echagaray: Another one related to USMCA negotiations and whether companies are changing their supply chains, relocating perhaps or changing their contracts. I don’t know if maybe Felipe probably or Francisco, if you guys have examples of these. I think earlier, Francisco, you mentioned that one of the potential negatives could be if there is no USMCA or negotiation, is that Mexican companies perhaps will continue to accelerate their expansion and their growth outside of Mexico. We’ve seen examples across the board, FEMSA, obviously airports. So, I guess that would be a negative, so to speak, for Mexico from that perspective. Any other examples from companies?
Francisco Suarez: I think that, linked to this idea of nearshoring and the competitiveness of Mexico, it’s about trying to de-risk from the political risk and trying to align our bloc and our value chains to this geopolitical reality and the needs of the entire bloc, in this case, North America. So, in Guadalajara, we have seen major examples of how companies like Foxconn has invested a lot of money over there. They’re making a huge drive into it. This is very important because there’s no iPhone without a Foxconn, there is no data centers without a Foxconn. You need that part of the value chain. So, it is interesting to see that we already see the benefits of that, and that tells you that there was potential. But on to your question on how do you see other companies invest in the world? For instance, cement companies Cemex and GCC will continue regardless of USMCA – if there is an agreement or not, they will continue to dilute their exposure to Mexico. Why? Because they see lots of prospects, a lot of global prospects going on in the United States, that are attractive enough for them because that’s part of their strategy.
But other companies as you mentioned, yes, they are trying to seek more investment support. This uncertainty clearly encourages them to do so.
Rodrigo Echagaray: Felipe, any examples that you can think of from your companies?
Felipe Ucros: So, we went very deep into the research on this one and it wasn’t really very impactful for our companies. There’s a few companies that had production that went across borders. They tended not to be huge percentages of their sales. It was always in the low single digits. For the most part, these are companies that also had plants in the U.S., so they were able to simply readjust the production and move the production over to the U.S. That was their plan.
But in the end, when essentially only products that were out of USMCA fell under the tariffs, essentially all of our companies were covered. So, none of them had to implement the plans that they had to shift production across the border for that small percentage. So, in general for our coverage, this tariff spat has not been an issue.
Rodrigo Echagaray: And maybe just to continue to pull on that thread, Hugo, you cover global equity strategy, and we just had Q2 earnings. What did we learn from that?
Hugo Ste-Marie: We still have to review all the figures, but as I mentioned before, Q2 numbers have been much stronger than expected in the U.S. If we go back to the pre-reporting season, consensus was looking for around 5% earnings growth in Q2. For the S&P 500, numbers are coming in closer to 10%. I’ll be honest with you, I was thinking that tariffs would have a more material impact on profit margins, and so far that’s not something we’ve seen.
When you look at the S&P 500 profit margins, it has managed to expand more than expected, and it’s not just tech related. Most sectors have been able to increase their profit margin versus last year. So, it’s a broad story. It’s not a narrow story related to only tech or TMT, even though those sectors have managed to increase their margins way more than the others.
Based on that, we have seen some positive revisions to Q3 earnings and to 2025 and at the margin to 2026 as well. So, it seems that the tariff store and tariff narrative is not biting as strong into profit margins that we were thinking just a few weeks and even a few months ago.
Rodrigo Echagaray: That’s a good way to perhaps wrap it up. But as Hugo points out, the market is not the economy and therefore we continue to see opportunities of re-rating in certain sectors and in the Mexbol, and also in the belly of the curve from a fixed income perspective.
Let’s wrap it up there. Thank you all for joining. Thank you to our clients for joining our call. And if you have any questions, please reach out. Very comprehensive report we put out yesterday on Mexico. So hopefully you’re able to take a look at that.
And with that, thank you.
