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Why is HSBC hot for Mexico?
Recent headlines about Mexico have been dominated by gang violence, corruption and weak economic growth. However, the country looks set to revive its fortunes, with investors and organizations like global bank HSBC keen to tap its potential.
On Tuesday, Stuart Gulliver, the chief executive of HSBC (London Stock Exchange: HSBA-GB), described the country as a "logical" place for Europe's biggest bank by assets to be present, even as he revealed plans to sell operations in rival emerging markets Brazil and Turkey and cut as many as 25,000 staff.
He told investors on a conference call that Mexico was "on the cusp of a major take-off" thanks to energy reforms introduced by controversial President Enrique Pena Nieto.
"We think this is transformational," Gulliver said, adding that "Mexico is different (to Turkey and Brazil)."
On Tuesday, Gulliver trumpeted that HSBC already had a "substantial business" in Mexico, with the U.K. bank making around 40 percent, or $22 billion, of its client revenue from its international network.
Mid-term election victories for controversial President Enrique Pena Nieto look set to give the government to introduce more economic reforms, analysts believe.
Nieto's presidency has been marred by Mexico's drug war spiraling further out of control and the disappearance of 43 students in a probable massacre by corrupt police. Nieto himself has been hit by corruption allegations, following revelations that he, his wife and his finance minister bought houses from government contracts.
However, Nieto has also delivered on his legislative pledges, including measures to end the state's monopoly over energy and open the telecommunications sector to competition, breaking the stronghold of billionaire Carlos Slim over the industry. The government has also tried to diversify its budget from the oil industry by raising taxes for higher earners and closing corporate loopholes.
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"Nieto and the government have passed a number of important reforms whose implementation this year and beyond could provide upside to GDP growth estimates for this year and beyond," said Citi's Stefan Nedialkov and Francesco di Giambattista in a research note on Monday.
July should bring the auction of the first set of Mexican oil fields up for grabs, ending the decades-long monopoly by publicaly-owned Pemex and hopefully reversing Mexico's sliding crude oil (New York Mercantile Exchange: @CL.1) output.
Mexico's economic growth is seen accelerating to 3.0 percent this year by the International Monetary Fund (IMF), up from 2.1 percent in 2014. 2016 expansion is seen by the IMF at 3.3 percent, while Gulliver forecasts growth could be as high as 3.5 percent or 4.0 percent in 2017-2018.
"Growth is projected to... strengthen in Mexico, thanks to lower oil (Intercontinental Exchange Europe: @LCO.1) bills for importers and robust economic recovery in the United States," said the IMF in its regional outlook in April.
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This contrasts favorably with other Latin American nations, as well as major emerging markets like Turkey. Growth in Latin America and the Caribbean is seen averaging less than 1 percent in 2015 by the IMF, with output seen falling in Brazil, Argentina and Venezuela.
"Nieto's government has left a lot to be desired on the social front, but it has delivered a lot on the reform side, not to mention a respectable pace of economic growth coupled with low inflation," said Marc Chandler, head of currency strategy at Brown Brothers Harriman, in a research note last week.
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The strategist said he still saw upside for Mexican assets (Mexico Stock Exchange: .MXX), especially when compared with other emerging markets. This was partly on the back of the real depreciation of the peso (Exchange: MXN=), which has boosted the country's competitiveness and seen the currency tumble against the likes of the Chinese yuan (Exchange: CNY=).
Another European beneficiary of a booming Mexico could be Spanish bank BBVA (Mercado Continuo: BBVA-ES). Mexico represents 40 percent of its earnings, according to Citi, which recently reiterated its "buy" on BBVA, with a target price of $11.76.
-By CNBC's Katy Barnato , follow her on Twitter @KatyBarnato.
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