Casa de Bolsa Finamex is a leading Mexican brokerage firm and provider of multi-asset market access. Finamex offers financial services to individual, professional, and corporate investors in Mexican capital markets and derivatives through offering direct and neutral access to the Mexican exchanges. KITE Invest sat down with Mauricio López Velasco Aguirre, the Chairman of Finamex, to get hear his perspective on the outlook of Mexico’s economy, the reforms, investment, and of course, Finamex and its over 40-year presence in Mexico.
KITE Invest: By 2050 Mexico could be the world’s fifth largest economy, and consequently, Mexico needs to show its true potential more than ever. An example of this potential is demonstrated by the grades the country received this year from the three major rating agencies (Fitch BBB+; Standard & Poors BBB+; Moody’s A3). Within the global economic context, and taking into account the current economic and political situation of the country, what is your opinion on Mexico’s growth for next year?
Mauricio López Velasco Aguirre: Mexico is finding itself at a special moment, because due to the crisis in the US the world was flooded with dollars. This caused interest rates to be close to zero, and many investors sought to yield through emerging markets like Brazil, Mexico, Chile, Colombia, South Africa, Australia, and others. This resulted in the dollar weakening against emerging currencies, the price of commodities strengthening, and many emerging countries experienced a positive growth. Those who did not develop competitive processing companies that add value and diversify economies are now facing in major fiscal deficits, such as in Brazil, South Africa, Turkey and some oil-rich African countries.
Some Europeans also borrowed beyond their capabilities, making a strong imbalance in public finances. It’s amazing that in 20 years the world has seen the financial sector break in Latin America, Asia, Europe, and North America. The world is also smaller now; there are no boundaries, communication is instantaneous, money transfers are done quickly, and information is accessible to everyone.
That said, we are facing an economic cycle of a completely different sort, where the United States is beginning to grow, and with that everything will revert back. Commodities will go down, the dollar will strengthen against other currencies, taking into consideration that the United States represents about 27% of the global GDP.
We had many problems 20 years ago, and the same thing happened to us. Strong international orthodox support measures were imposed and our world was upside down.
Three main changes took place:
1) The autonomy of the Central Bank, signing of the free trade agreement, and mandatory pension funds occurred. With these measures the country changed over time. Private saving funds, pension insurance reserves, and bonds are now very important growth engines, of which the government controls, because if not domestic debt in Mexico would grow.
2) Thanks to the free trade agreement, the Mexican businessmen were forced to reach higher standards to compete with the domestic market and to take advantage of exporting due to labour costs and Mexico’s geographic location. Mexico has benefited from being near the major consumer and producer of the world, and the treaties removed many barriers so that imports and exports could pass freely.
3) It is a cycle. First the maquiladoras were developed to make way for added value industry, accounting for 30% of the GDP today. Mexico now produces top-notch refrigerators, cellular telephones, televisions, automobiles, automotive parts, and aerospace, all of this shows the magnitude of change.
On the other hand, the economy was the most orthodox it had seen in 20 years. We put very clear rules, and while everyone went into debt, Mexico strongly positioned its savings, debt, GDP, and bank strength.
Mexico is well positioned, has the necessary components established as mentioned, although affected by circumstances, such as the drop in oil prices, export production, growth of reserves, remittances, the strengthening of the peso, lower commodity prices and stable inflation. In addition to the major reforms that have been implemented in the country, like energy, telecommunications, education, the financial sector, Mexico on the whole has become a strategic choice for global investors.
KITE: Informality and productivity are two residing issues in the Mexican economy. How can the situation be resolved? What do you believe the right policies are?
MLVA: Regarding the change of policies, just as other large measures were taken twenty years ago, this year very important measures were also taken. One in particular was energy; Mexico is positioned as the 5th or 6th country in terms of oil and gas reserves.
The other major change was in telecommunications. With all the changes the economy has become more open, monopolies will be disappearing over time, and there will be more competition. As we have seen in the case of telecommunications, where in less than six months we are seeing the benefits of reduced tariffs in favour of the consumer.
In the case of energy, PEMEX invests around 18 billion USD a year; these changes are expected to bring between 40-50 million USD into the country. However, these changes are not immediate; they will take several years to process, and we must take into account the delayed implementation due to the low price of oil. When there isn’t an energy monopoly, when there isn’t an electricity or communications monopoly, prices can adjust, and therefore, demand will expand and many Mexicans will move from informality to formality.
Another important change is the reform of education. A country without education will never grow. Changes come in cycles. Informality is going to change to formality thanks to all these changes we have been discussing.
KITE: Do you believe that the current legal framework accompanying the reforms provide security for investors?
MLVA: Twenty years ago the free trade agreement was signed. There are no restrictions for international companies established in the country according to the treaty stipulations. As an example, in Mexico more car brands are sold than in the US. If in 20 years the system hasn’t changed, given the position we’re in and the benefits from the structural reforms, I hardly think it is going to change.
KITE: The year 2014 presented some volatility driven by lower oil prices and uncertainty over the Federal Reserve System. Nevertheless some stocks listed on the IPC increased by 405% in 2014. By 2015 there is an estimate that the IPC will be between 47,000 and 48,000 points, implying a gain of 12%. What is your assessment of the behaviour presented the Mexican stock market in 2015?
MLVA: The multiples on the Mexican Stock Exchange are the same as in the North American markets that have appreciated considerable; nevertheless, keeping in mind that the IPC is relatively small and pension funds don’t have much capacity. In the last three years large investors have had little place in the country, but as many country funds have to be diversified a portion should be invested into emerging markets, of which Mexico remains one of the best options.
All of the mentioned reforms will open new industries, such as wind, gas pipelines, new assemblers, as they all now have the capacity of increasing significantly. Mexico has also developed investment areas that did not exist before such as the FIBRAs and the SECADES. Certainly, there are many great opportunities.
KITE: Please explain briefly the history of Casa de Bolsa Finamex and milestones achieved to date?
MLVA: We have been a brokerage firm for 40 years and during these 40 years we have seen it all. Mexico went bankrupt, as did Russia, and the South American and Asian banks failed. Japan has had very little growth in 20 years and Europe is also broke. In Mexico there has been hyperinflation, devaluation, nationalization of banks, privatizations of banks, and during all of these Finamex has been in the front line.
Forty years ago there were 29 brokerage firms, today there are very few who follow the same pattern and way of working.
In 1984, the Central Bank made us specialists, whereby they intervened to determine the rate through monetary policy. We developed all abilities and as a result, also credibility. We were among the first brokerage firms that established the electronic mechanism of capital market, DMA, and algorithms sales. Today we are connected directly to the machine robots of large financial global companies, and this places us within the global standard. Credibility is very important and Finamex has built this over a 40-year time span.
KITE: How would you define Finamex’s relationship with its customers, what percentage of the total portfolio of clients represent international investors?
MLVA: It depends on each of the sectors. Another major niche we have exploited are derivatives, and in that respect almost all counterparties are foreign because we know what the best book for commodities is worldwide. Private pension funds, known as Afores, insurance reserves and family offices also represent a very important market sector and they are going to continue to grow. We have also been very strong in the institutional sector domestic and foreign, and our clients are very large firms and international banks.
KITE: According to our information, Finamex wants to double its workforce and quadruple the number of customers. Currently Finamex has offices in Mexico City, Monterrey, Guadalajara, Puebla and Queretaro. Tell us about the growth strategy and expansion plans Finamex?
MLVA: The money in savings accounts is large with very low rates, and Mexico has had an average inflation of 4%, and this causes saving accounts to yield negative interest rates. The sector between one and ten million pesos is neglected and that is out niche area and strength.
We will double the sales force in time, not necessarily the entire brokerage house, but in the areas where we believe there to be a large window of opportunity. Foreign banks, and the regulations and fines imposed by them, have reduced these areas, which has put us in a comfortable position and with our experience we have a great growth opportunity.
KITE: Finamex has exported its technology and algorithms to more than 52 global companies in the United States, Brazil, Peru, Canada and the UK, using electronic technology to work in the financial sector in Mexico. What do you define as the main competitive advantage of Finamex from the other international companies that are using your electronic operating technology?
MLVA: Not only must we take into account the electronics, but also Finamex is an institution with many operating authorizations, which allows us to offer our customers globally diversified investments. We have been working for 20 years, and after making a purchase there are many processes: liquidation, compliance, money laundering, meeting clients, etc. We audited six or seven financial institutions and not by law, but to address reputational risk because it ultimately translates into credibility.
KITE: In recent decades Britain has contributed with between 1% and 3% of the total foreign direct investment entering Mexico. Because of the advantages gained by reforms in the energy sector, fiscal, educational and telecommunications sectors, they will position Mexico as one of the most attractive destinations for foreign investment, to which a significant increase is expected. What is your assessment of the role the UK will play in the future attraction of capital into Mexico in the coming years?
MLVA: We have customers in the United Kingdom, long-term players that have developed technology in many sectors such as the energy consumption of services and more. Keeping in mind that UK went through a very complicated crisis, which it is already out of, they are very good partners, there are many companies that have been around for a long time and will continue on in the country. All new investments in telecommunications and gas are going to be very long term as it is in these areas where the UK has great experience.
KITE: Given that London is considered as a global financial centre and the Bank of International Settlements’ data shows that British financial centres account for about 20% of international loans and deposits. Taking this into consideration, what message would you like to send to all British investors about Mexico and Finamex?
MLVA: I think in the next 10-15 years the phenomenon of Mexico will continue south. There is much interest in developing the entire region of South America and the United Kingdom will start to become a major player in it.
KITE: If you were to associate the brand Finamex to three concepts, what would they be?
MLVA: Globalization, innovation and service.