The still preliminary results from mid-term elections on Sunday confirmed how polarized Mexico has become politically. About half the country supported the populist Morena and its allies, with the other half backing a (fragmented) mostly center/right pro-business opposition. Given that the electoral system favors the strongest individual party, the vote led to Morena and its allies likely winning about 53%-58% of the lower House of Congress, albeit losing its two-thirds majority, and 11 Governorships. Morena remains dominant, and now has Governors in about half the country’s states, up from a handful beforehand, but its wings have been clipped a bit in Congress.
In this highly contentious environment which may get more challenging as time goes on, and which has a significant impact on the corporate and economic outlook, how should companies and Investor Relations teams respond? The political context and influence on public policy and company profits is too important to ignore but taking a partisan position in public is also fraught with dangers, and arguably beyond the remit of a public company. Most importantly, how can companies construct a positive but authentic investment narrative when most of the business class believes Morena’s policies are hurting and will continue to hurt Mexico’s investment and growth outlook, and may even undermine Mexico’s democratic institutions?
Here are some of our recommendations.
Investors have their own sources on political and economic outlook, including economists and political consultants from all the leading banks. For the most part they prefer companies to talk about variables they control, and issues they face, and not to opine too much about politics and economics. So we recommend keeping written and public comments on the political and economic variables to a minimum. Just because politics is important, it does not mean companies need to focus on it. They should spend most of their time talking about issues they have a unique insight on.
To the extent investors want to talk about politics and public policy, stick to facts, public sources and avoid controversy. For electoral outlook, Oraclus (poll of polls) is a great source and seems to have been fairly accurate in predicting the outcome on Sunday. For the policy outlook, various consultancies (GEA< Integralia) provide analysis which can be quoted or used as a reference. That way the company can avoid taking its own position too much but address the issues.
If a company is directly impacted by a political or legislative dispute or policy change (for example Ienova in gas pipelines, Femsa being forced to pay disputed back taxes, Grupo México and disputes over mining concessions etc.) address the issue in a factual and honest way, and if necessary, manage scenarios of what may happen, without committing to a specific outcome. Investor Relations should involve corporate lawyers and public affairs colleagues before signing off on any text related to issues with litigation or political ramifications.
Needless to say, plenty of companies can do well in a negative Mexican political environment, (and poorly in a positive one), and companies need to explain that politics is only one of many variables affecting their outlook.
- Most obviously, many Mexican companies (Orbia, Bimbo, Gruma, Cuervo, America Movil, Cemex, Femsa…) have sizable, and in some cases dominant, operations outside Mexico.
- Other companies are exporters or commodity producers, and more impacted by global demand and prices for their products than anything that happens in Mexico (Alfa, Alpek, Grupo México, Peñoles).
- Even domestic companies can do well in a difficult political environment if for example consumer purchasing power is boosted by populist policies (Wal-Mart, Femsa) or if interest rate hikes lead banks (Banorte, etc.) to make more money.
- There are plenty of megatrends – the move to digitalization, urbanization, nearshoring and USMCA, ESG issues, home ownership – that are at least as important as who is President of the country, and while less evident than an electoral result, over time will have a larger impact on corporate results.
- The external environment / US economic growth, global interest rates, pandemics, and so on, have proven to be more important over time than the domestic environment. Of the past 6 market crises, arguably only one has been driven by domestic factors, just as Mexican bull markets have been mostly globally driven. Right now the global environment looks quite encouraging for Mexico.
- Morena has followed prudent fiscal policies since taking power, while its appointees in Banxico have been orthodox and supportive of controlling inflation. Hence Mexico is benefiting from a stable exchange rate for five years (except COVID panic), and country risk has fallen sharply. As long as the macroeconomic situation is stable, most Mexican companies will do fine.
- Morena no longer holds a 2/3 majority in the lower House, and remains below the threshold to make constitutional change in the Senate. And in three years, AMLO will likely have to step down as President, and his successor will likely be more moderate, even if most likely from the same party.
- Mexico’s stock market has risen 22% in USD terms since AMLO took power, actually better performance than the average performance in the first three years of his four market friendly predecessors, according to a Santander report.
Track record. Most listed Mexican companies have successfully managed many crises before: 1995 (Tequila), 1998 (Russia), 2008 (Lehman), 2016 (Trump), 2018 (AMLO), 2020 (COVID-19), and know how to adapt to difficult circumstances quickly. Most have strong balance sheets, powerful competitive advantages, and a long-term horizon. Investors who bought shares in challenging periods have been generally rewarded. As Charlie Munger likes to say, ‘A great business at a fair price is superior to a fair business at a great price’ and crises allows investors to pick up great companies at good valuations.
Be politically and socially sensitive but authentic. Every company has to deal with the government it has, which is not necessarily the one it would like. Talk about investment and job creation, and not about job cuts and downsizing. Talk about ESG and corporate social programs. Do not show off too much if profit margins are expanding. At the same time, if a government or its policy are undermining confidence, or impacting investment plans or profitability, it is fine to say so, but in a prudent and careful way. Investors want company officials to be authentic and transparent and a reliable source of information.
Contacts at Miranda Partners