Expert Contribution: Economic and Stock Market Outlook 2023 by Monex

2023: A defensive economy

The global economy has shown signs of strength in the first months of 2023, contrary to the concerns at the end of last year, and although risks remain, the likelihood that a new recession will occur soon has diminished. The reopening of the Chinese economy, the savings bases in advanced economies and the absence of major incidents such as those that abounded in 2022 have favored this inertia. Even the International Monetary Fund's growth projections have improved from what was expected in October, since an increase of 2.8% is projected for the entire world instead of a 2.7% increase, and some countries, such as the United States, had a more significant revision, going from a projection of 1.0% to 1.6%.

However, the outlook is not entirely clear, as several industrial sectors have accumulated months of declines and world trade has slowed, which, if sustained, could open a deep crack in growth dynamics. Even though inflation levels are lower than a year ago, they are still far from Central Bank targets, so monetary policy has remained restrictive, restricting growth prospects even more. Consumption momentum on other fronts has also prevented inflation from dropping significantly.

In the balance sheet, the year is looking at a horizon of moderate, but not non existent risks, as well as a slow but steady slowdown. For the United States, we expect GDP to increase by 1.5%, with the possibility of reductions in the final months of the year. Similarly, inflation would decline to 4.0%, which would force the Federal Reserve to keep interest rates unchanged in a range between 5.00% and 5.25%.

Outlook for Mexico

Due to new investment flows, the nearshoring phenomenon, and strengthened domestic consumption, Mexico's performance has been in line with global conditions, but with an optimistic bias. The economic figures between January and April have been among the most outstanding in the last five years and project a generous benchmark for the full 2023 growth calculation. Consequently, we estimate a 2.5% increase in GDP, but if the rule of law, infrastructure supply, security conditions, among others are significantly improved, the potential for growth is much greater.

Despite annual inflation averaging 7.2% until April, data for the last three fortnights have shown quite different results and a trend consistent with Banco de México's objectives could emerge during the next 12 months. As such, we expect inflation in Mexico to decline sharply during the summer and could fall below 5.0% at some point in the second half of the year. This would take pressure off the expectations decomposition process and balance the risk horizonfor monetary policymakers.

In this sense, we consider that the Bank of Mexico has reached the ceiling of a rising cycle with the May 18 increase that left the rate at 11.25%. Although in fact, the nominal rate will remain static, the real rate will continue to adjust as a result of the reduction in inflation expectations. As we see it, if the economy's situation becomes less robust in the future, tighter monetary policy and declining inflation could enable movements in the opposite direction after a few months. We expect a 50-basis point cut in the fourth quarter and a nominal rate of 10.75%. 

Lastly, so far in 2023, the peso is pegged at 8.8% against the dollar, an outstanding performance that is not exclusive to this cross, since this has also happened with other currencies, reflecting an integral strength of the determinants of the Mexican open economy. These include higher flows of remittances, exports, investment and the widening of interest rate differentials with respect to the United States. Although we believe that the super peso's good run may continue for a few weeks, we believe that the reversal of several of the aforementioned trends will lead to a depreciation in the second half of the year. Our closing projection is $19.20, which will also be accompanied by greater volatility due to the proximity of the electoral processes in Mexico and the United States.

Stock Market Outlook

For IPyC the estimate is 58,000pts by the end of 2023

During the year, our market had a yield of 11.5%, where participants have preferred value companies over growth companies. As of 1Q23, IPyC companies showed some resilience, and although Sales and Ebitda rose 6.7% and - 0.5%, respectively, it was in line with estimates; we observed improved margins and lower leverage, although there was an increase in accounts receivable.

For all of 2023, we estimate an increase in Sales and EBITDA of 6.3% and 5.4%for IPyC companies.

With such growth and a target FV/Ebitda multiple of 8.1x, similar to the average of the last three years, our target level for IPyC is 58,000pts, which would be equivalent to an estimated yield over current levels (of 54,265pts) of close to 6.8%. The valuation of our market is more attractive compared to other emerging markets and even compared to North American markets. However, with the current rates level, the attractiveness of our market is limited and does not compensate the risk-return ratio.

The Favorites

Considering the estimate for our benchmark index, the IPyC, some companies that, due to their valuation, growth and/or higher estimated yield, look more attractive are: Gap, Cemex, Gmexico, Oma, Femsa, Walmex, Chedraui, AC, Prologis, Liverpol, Pinfra and Volaris. Our selection is based on current valuation and pricing conditions, which may change depending on natural variations in stock prices and estimated returns.

Risks

At an international level, we identified the following risks:

1) Geopolitical conflicts; 2) Structural weakness in China; 3) High world inflation; 4) High interest rates for a prolonged period; 5) Financial crisis; 6) Increase in world debt; 7) Impact on economic growth; 8) Debt ceiling in the USA; 8) Electoral process in the USA.

National Level:

1) Lower economic growth; 2) Legislative uncertainty and lack of rule of law; 3) Rarer political climate; 4) Initiatives against autonomous agencies; 5) Differences on various issues with the USA; 6) Possible fines/tariffs for non-compliance with trade agreements; 7) Increased insecurity; 8) Electoral
process.

Authors:

Carlos A. González Tabares
Director of Exchange and Stock Market Economic Analysis
crgonzalez@monex.com.mx
5552314521

Marcos Daniel Arias Novelo
Economic Analyst
mdariasn@monex.com.mx
5552300200 ext. 4186