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Mexico, international financial investment opportunity

Mexico, international financial investment opportunity

Posted by Ricardo Vázquez on September 15, 2014

Most U.S. investors would be shocked to learn that the Mexican stock market has averaged 15 percent for the last 10 years (through Aug. 31), nearly doubling U.S. stocks that have only an 8 percent 10-year average annual return. However, last year Mexico’s stock market fell 2 percent while our S&P 500 soared 32 percent. (So far this year U.S. stocks have posted a 10 percent gain while Mexican stocks are up only 5 percent.)

Despite Mexico’s well-publicized drug and crime problems and its reputation for political corruption, the Mexican economy has done well this decade, averaging 3.6 percent GDP growth from 2010 - 2013, compared to our 2.3 percent average.

Barron’s (9/8/14, p. M4) argued last week, under the heading “Bullish on Mexico,” that: “One major bright spot amid a sea of turmoil and uncertainty around the world is Mexico, which … is having its day in the sun.” Why do I, and many others, believe that our southern neighbor is posed for strong economic growth? (It could be as much as 5 percent annually next year claims Bridgewater Associates, a Connecticut firm managing $120 billion.)

I believe there are five key reasons that optimism about Mexico’s economy is valid. (1) Political reforms completed last month make Mexico more attractive to foreign investment. (2) Mexico has a low-paid, hard-working, young labor force. (3) It has access to energy from its own oil and cheap natural gas from U.S. pipelines that flow north to south. (4) It has free-trade agreements with 44 countries compared with only 20 for the U.S. (5) Mexico will benefit from an expected pick-up in U.S. economic growth, its No. 1 trading partner. (Revised estimates now have second quarter U.S. growth rising by over 4.5 percent.)

The changes in Mexico’s political climate began when its “charismatic new president,” (Wall Street Journal. 12/16/13), Enrique Pena Nieto, assumed his office in December 2012. His economic-reform package was largely completed last month, opening up Mexico’s vast oil reserves. (Mexico, Canada and the U.S. now have proven oil reserves that are more than double all middle-east reserves!)

For 76 years, since March 18, 1938, when Mexico nationalized its oil industry, kicking out all foreign companies, it has had one government-owned oil company, PEMEX. As one might expect, it was historically inefficient, bureaucratic, and plagued by political corruption.

On Aug. 11, new legislation passed that would permit foreign oil companies to invest in Mexico once again. They may choose from three options: (1) profit-sharing contracts, (2) production-sharing contracts, or (3) licenses that permit payment in oil or natural gas extracted from each project. The U.S. Energy Information administration was so impressed that, on August 25, it raised Mexico’s long-term oil production estimate by 75 percent over its previous 2013 forecast.

Mexico’s median age is only 24, compared with 37 for the U.S. and its manufacturing wage is slightly under $4 an hour. Another advantage is geography; Mexico’s proximity to both oceans lowers its shipping costs.

Its free-trade agreements also are advantageous. One example: cars manufactured in the U.S. that are sold in Brazil are 55 percent more expensive than those same autos produced in Mexico that are sold in Latin America’s largest country. Mexico has a free-trade agreement with Brazil; we don’t — thanks, of course, to the usual Congressional inaction.

Eighty percent of the cars built in Mexico are exported — about two-thirds go to the U.S. Mexican auto production has doubled in the last five years as foreign manufacturers, particularly Nissan, Honda, and Volkswagon, have invested $19 billion there to build new factories. Recently, Mercedes-Benz and BMW have announced plans to locate in Mexico and Hyundai-Kia is expected to before year-end.

Nissan’s two new factories, just outside Auguascalientes, produce one new car every 38 seconds, running 23 hours a day, six days a week. (See Mexico’s Carmaking Boom, Forbes, 9/8/14, pp. 129-134.) Mexico is now the world’s eighth-largest auto manufacturer and is expected to pass No. 7 Brazil when final 2014 numbers are available early next year.

Clearly the lowest-cost, easiest way to invest in Mexico is to buy essentially the entire Mexican stock market through the iShares Mexico ETF (EWW) that has gained 5 percent this year. I added it to my portfolio last December.

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