Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy for Morgan Stanley.
Nik Lippmann: I'm Nik Lippmann, Mexico Equity Strategist for Morgan Stanley.
Michael Zezas: And on this episode of Thoughts on the Market, we'll be discussing the trend towards slowbalization within a multipolar world, a move that's been accelerated by recent geopolitical events, and in particular, the opportunity for Mexico and global investors. It's Wednesday, May 19th, at 1 p.m. in New York.
Michael Zezas: So we've talked a lot on this podcast about the trends of slowbalization and the shift to a multipolar world. It's basically the idea that the globe is no longer solely organizing around the same political economy principles. And that, for example, the rise of China as an economic power with a political system that's distinctly different from the West, creates some barriers to economic interconnectedness. And we've talked a lot about how that can create new costs for Western companies and inflationary pressures, as all of a sudden you need to make investments, for example if you're Europe, to build an infrastructure to import natural gas from the U.S. so you don't have to buy it from Russia anymore. But this trend isn't all about creating headwinds and costs for the economy, we think there's opportunity, too. And there's regions that we think stand to benefit from an uptick in investment as American and European companies need to recreate that labor and market access in other parts of the globe. Mexico is one country that stands out to us, and so we want to speak with Nik Lippmann. Nik, can you tell us why you think Mexico is poised to benefit here?
Nik Lippmann: So I'm sitting down in Mexico watching all this stuff play out from a number of different angles. And it's clear to me that Mexico will play a role. It's right next to the U.S., you have trade tariff protection, and multiple levels of rights are protected by the USMCA. And Mexico has advanced tremendously in terms of advancing the value chain and moving up in terms of complexity. So it's come a long way over the last sort of two decades. And today what we see in Mexico is really a strong ecosystem for electronics and cars and even some aerospace. When I look at this recovery, post-COVID in Mexico, I see kind of an average recovery, to be honest. But right below the headline number, we see something else going on. We see electronics growing 40%.
Michael Zezas: So you mentioned a lot has changed in Mexico recently that makes this possibility more likely. What is it that changed? Why couldn't this have been a greater opportunity for Mexico earlier?
Nik Lippmann: I think that after the trade tensions with China, the pandemic, we've just been getting, you know, higher freight costs. We've been getting a number of obstacles to the existing trade framework. So there are certain external policy factors that clearly play in and it's clear that the chip has kind of changed over the course of the beginning of this year and opened the eyes to some of the risks that could be emerging in other parts of the world. It's clear that Mexico's able and fairly high quantities of labor. There will be needs to educate and develop further infrastructure. But Mexico's position and its proven track record in terms of making electronics and cars. I think that can be expanded into other things. And we're seeing the early stages of that on the ground already today.
Michael Zezas: So geopolitics is an obvious catalyst for Mexico to be a beneficiary generally. Specifically, what sectors of the economy in Mexico stand out to you as an opportunity?
Nik Lippmann: So when we look at what Mexico does today, it makes cars and refrigerators and microwave ovens and stationary computers. It doesn't make laptops, tablets, and I don't think it will ever make tablets, mobile phones. I would imagine that we start seeing ecosystems and I always focus on ecosystems rather than individual companies, that you start having an emergence of some of the low tech health care, aerospace is growing tremendously, even pharma. And I think one of the things that I would expect to happen and it's difficult to have clear evidence today, but I would expect some corporates to at least diversify their existing supply chains rather than just relying on one country. I think Mexico just tends to benefit in that process.
Michael Zezas: And so as a market strategist, what do you expect to see or how do you expect to see this play out in Mexico's equity markets?
Nik Lippmann: By and large, I think this is a 3 to 5 year system or thesis or theme that will have a tremendous impact on potentially improving the narrative of Mexico. And it's going to impact a wide range of their corporates that would come on the U.S. side of the border. From the car space to electronics and machinery and what have you. And it doesn't happen from one day to another. But the country's fairly well positioned. Look, I think in terms of the investability impact, clearly a couple of sectors stand out, such as real estate. This is a more than a near-term in theme that would cause us to change the recommendation from here till the year end 22. I think it's a key fact in terms of how we suggest investors to have allocation within Mexico focus on industrials, external sectors and real estate with exposure to the U.S.. And I think for a lot of investors in U.S. corporates, in manufacturing and out of the auto space and other sectors, this is a super important longer term theme that can affect and maybe redevelop to some degree in Mexico investment narrative.
Michael Zezas:Nik, thanks for taking the time to talk.
Nik Lippmann: Thanks, Mike, for inviting me.
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