Why Your Next Dollar Should Go To Mexican Stocks

By Aaron Levitt | June 26, 2014 AAA

The World Cup has brought attention back to former emerging market superstar Brazil. As the 'B' in 'BRIC,' its abundant natural resources, strong government and growing middle class, have made it the poster child for growth in the region. Investors seem to agree, as there is now $4 billion in the broad iShares MSCI Brazil Index ETF (EWZ).

And while there is still plenty of samba left in Brazilian stocks, another Latin American nation could be a better long term bet. America's southern neighbor, Mexico, could be one of the most dynamic places for investors to place their money right now. (For related reading, see: Mexico: The China of the Americas.)

Regaining Manufacturing Muscle 

Thanks to a series of free-trade agreements with the United States and other nations, Mexico is quickly becoming a manufacturing powerhouse. Trade now represents 60% of Mexico's total GDP, and more than 80% of its exports are manufactured goods. That figure has quietly tripled since 1980, and has strengthened even more since the implementation of North American Free Trade Agreement (NAFTA). (For more on this topic, see: Pros and Cons of NAFTA.)

And even better days could be ahead for Mexico.

Those trade agreements, with Japan and nations in the European Union, have brought in a tremendous amount of foreign direct investment. According to Mexico’s Finance and Public Credit Secretariat, the nation saw a record amount of FDI in 2013 at over $35 billion. That’s nearly a 178% increase over 2012. And that number is set to grow even more as several multinational corporations like Callaway Golf Co. (ELY) and Caterpillar Inc. (CAT) have begun expanding their operations in Mexico.

The reason is simple: lower costs.

Mexico continues to gain manufacturing market share away from rivals like China. First, energy costs are cheaper, as Mexico benefits from cheap natural gas produced in the United States, as well as its own petroleum production. There are now several pipelines that move natural gas downwards into the nation for electricity generation. Secondly, transportation costs are low, as both rail and truck traffic into the U.S. is robust. Finally, Mexico benefits from lower labor costs. Due to Chinese wage inflation, labor costs in Mexico are now about 20% cheaper. Just ten years ago, it was double China’s rate.

That shift and manufacturing growth will help Mexico see a 3.9% boost to its GDP this year, and a 4.7% increase in 2015, according to Mexico's finance ministry.

Tapping Into Mexican Manufacturing 

Given Mexico’s continued success as the world’s manufacturer, investors may want to consider overweighting it in their portfolios. While most Latin American focused ETFs, such as the SPDR S&P Emerging Latin America (GML), include hefty allocations to Mexico, there are ways to directly tap into Mexico’s maquiladora muscle. The easiest is through the iShares MSCI Mexico Capped ETF (EWW).

EWW tracks 59 different Mexican firms, including telecom giant America Movil (AMX) and Wal-Mart Stores, Inc.'s (WMT) Mexican subsidary Wal-Mart de Mexico (WMMVY). Expenses for the nearly $3 billion fund are low at 0.48%. More importantly, EWW has been a tremendous performer. Since its inception in 1996, the fund is up nearly 845%. The Deutsche MSCI Mexico Hedged Equity ETF (DBMX) can be used, as well, to take the peso out of the equation.

One of the benefit of NAFTA has been the proliferation of Mexican companies on U.S. exchanges. One of the best plays could be cement producer CEMEX (CX). CX was hit hard during the recession, as a result of dwindling construction activity, as well as an ill-timed acquisition. However, things seem to be on the mend, as the recovery in the U.S. bodes well for CEMEX’s bottom line. Analysts now have a $14 price target on the stock. Likewise, steel maker Grupo Simec (SIM) could be a good U.S. recovery choice.

Finally, as we’ve seen in other parts of the emerging world, an expanding local economy leads to an expanding middle class. And Mexico is no different. That makes both FEMSA (KOF) and Grupo Televisa (TV) prime picks. KOF is the leading Coca-Cola Co. (KO) bottler in thw world, while TV is the leading television broadcaster/programmer in Mexico.

The Bottom Line

Mexico is quickly moving to become a leading world manufacturer. Several free-trade agreements, along with lower labor and transportation costs, are boosting its manufacturing muscle.

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