Kenneth Rapoza, Contributing Editor @FORBES
Why Investors Love Mexico
For many investment firms, Mexico has become a number one overweight in their global portfolios.
And it has paid off. As measured by the broad iShares MSCI Mexico (EWW) exchange traded fund year-to-date, large cap Mexican equities have risen 17.5 percent, beating the MSCI Emerging Markets index’s rise of 2.29 percent and the S&P 500′s rise of 9.49 percent.
Th economy has been doing well, though that was partially because of the U.S. in the first half of the year. The next two quarters are expected to be much worse for the U.S., and so Mexico will feel some drag on its economy because of it. Newly elected politicians from PRI are more pro-growth than they have been in the past, singing the praises of the private sector. And wage growth in Mexico is flat, while it is rising in China. The population is young, so Mexico has a demographics edge that China does not have. Or Russia for that matter. Earlier this month, Nomura Securities even forecast that Mexico would overtake Brazil as the largest economy in Latin America.
Mexico is currently the 12th largest economy in the world. Brazil is around No. 6. Mexico’s GDP last year was $1.65 trillion, up from $1.59 trillion in 2010 and $1.51 trillion in 2009. By comparison, Brazil’s GDP in 2011 was $2.2 trillion.
“Mexico is not some flavor-of-the-month economy. It might be some flavor of the month in different years, but overall this is a very important economy and will continue to be so, even more so than it ever has been,” says Heiner Skaliks, portfolio manager at the Strategic Latin America fund (SLATX) based out of La Paz, Bolivia. The fund has 40 percent of its fund in Mexican equities or dollar denominated bonds. “A lot of people were waiting for the elections to be over. Now we know the PRI is in. They want private sector investment. They want to be a global player from an economic perspective. The questions about the election are behind us and now you can do the very difficult work of putting the policies in place to help position Mexico in the emerging markets,” says Skaliks.
PRI party member Enrique Pena Nieto was elected president on July 1.
See: Mexican Capital Markets Poised For Post Election Boost – Reuters
As Mexico strengthens so will its currency, still trading around 12 pesos to the dollar. It will be a Catch-22 for Mexico: good for importing capital goods; bad for exporters. A stronger peso will also help some big Mexican corporations that are now shopping abroad for acquisitions and joint ventures.
“One of the things we like about Mexico is that you can get big, liquid names that have a significant portion of their revenue stream from other parts of the world. Coca Cola’s subsidiary is listed in Mexico and 60 percent of their revenues come from South America. A lot of the companies are multinational in nature,” says Skaliks.
Audrey Kaplan, a fund manager at Federated InterContinental (RIMAX) in New York said Mexico is an overweight for her. ”We’ve had an overweight there since the fall of 2009,” she says. “A number of our shares in Mexico are up 40 to 70 percent since we purchased them, in absolute terms.” She said that Carlos Slim’s America Movil (AMX) was a top hold for them. She said she expects it to beat the BMV benchmark.
In LaPaz, Skaliks likes the micro-financing story in Mexico and one way he plays that is through the bonds of Financiera Independencia. Another favorite is Cemex (CX). He owns their 2016 dollar denominated bonds yielding 10 percent and ADRs listed on the NYSE. Cemex’s ADRs are up 27 percent year to date.
Another favorite is construction firm Empresas ICA (ICA). “As Mexico grows, it’s the same emerging market story. You need roads. You need bridges. You need sewer systems. And then when you have a leadership that is more market friendly, there is room for a private sector player like ICA in that development,” says Skaliks.
This Friday, the Central Bank of Mexico will release its monetary policy decision. The latest data on economic activity and inflation, alongside the recent central bank statement, are in line with keeping rates unchanged. In terms of output, although growth forecasts for this year remain above 3.5 percent, uncertainty around the external scenario and signs of a domestic slowdown continue.
In the first five months of the year, industrial construction output expanded at rates above 4 percent. While that is expected to slow in the second half, somewhat, Spanish bank BBVA raised their forecast for Mexican GDP growth to 3.7 percent this year, with unemployment falling to 5.1 percent.
ABOUT KENNETH RAPOSA: “I covered Brazil pre-Lula and post-Lula and spent the last five years covering all aspects of the country for Dow Jones, Wall Street Journal and Barron’s. Meanwhile, for an undetermined amount of time, and with a little help from my friends, I will be parachuting into Russia, India and China. (I figure if Anderson Cooper can parachute, I can parachute.)”
Resume/Professional Profile: http://www.linkedin.com/pub/kenneth-rapoza/5/809/257