The sensitivity is because of a large foreign ownership of Mexican bonds. Roughly 58 per cent of the total local bond stock in the country is held by foreigners. In difficult times, the forced selling of Mexican bonds is even strengthened by the high degree of commercialisation of the MXN. The peso is the most-traded currency in the emerging world.
Bond investors can sell easier in Mexico than in most other Latin American countries. This is a technical issue that during an emerging market sell-off can produce serious headwinds for the Mexican market, in spite of its strong fundamentals.
The vulnerability of the peso is a reason to be cautious. But if investors fear continuous pressure on emerging market capital flows they can still have an overweight stance in Mexico, as long as they keep sizeable underweights in the markets that are vulnerable to negative emerging market flows for fundamental reasons.
Maarten-Jan Bakkum is senior emerging market strategist at ING IM
