Mexico is The New ChinaMexico is The New ChinaThis Boomtown is Kicking China's Dragon
The only thing most people know about Mexico is what they see when flipping channels past Univision.But what they don't know can make you money.Mexico is the biggest unreported story of the year.Mexico is on fire.Just look at the Mexican ETF (NYSE: EWW) compared to China (NYSE: FXI) and Brazil (NYSE: EWZ):India and Russia are well off their highs as well.Face it, BRIC is dead. But the stock market of our good neighbor to the south is making new highs.In fact, the Mexican Bolsa IPC Index is just off its all-time highs of 41,600. It looks like the best-performing stock market of the last twenty years.Big TradeThe U.S. is Mexico's biggest trade partner, with 80% of its exports. That might seem like a lot, but this is down from 87% just a few years ago as Mexico diversifies its economy.The country currently has 44 free trade agreements. Mexico is the U.S.'s third-largest trading partner and Latin America's second largest economy.Mexico is growing for a number of reasons...First, it is close to the U.S. and in NAFTA.There is no high fuel cost/time delay from Mexico: You place an order, you get in a few days. No muss, no fuss, and fewer pirated technologies. (It could take a month before you realize you got the wrong 50,000 widgets from China.)Furthermore, there are no tariffs, fees, duties, or trade wars.It's no wonder Mexico is now the fourth-largest automobile exporter in the world.Cheaper than ChinaIt's all about money.China has its currency loosely pegged to the U.S. dollar. So, while Bernanke prints money and devalues the dollar, the yuan stays within a range. Up until 2010, the yuan was hard linked to the dollar.That's why the following chart shows so many jumps and looks manipulated.Because it is manipulated. By the state.Mexico's currency floats on the open free market.This means Americans pay 30% more for Chinese goods and 40% less for Mexican goods than they did five years ago.(It's a good rule of thumb to flip these charts over in your mind to see the dollar gain. I used to just turn over the pink Financial Times, that's how old I am.)So, over the past five years, the dollar is going down versus the Chinese currency, but it has gained versus the Mexican peso.And it gets better for the China haters...According to Boston Consulting Group, China's average manufacturing wages, when adjusted for productivity, are now higher than Mexico's.They forecast that by 2015, the cost of a Chinese worker will be 25% higher than a Mexican worker.Lots of Young PeopleMexico has one of the best population pyramids in the world.More young people mean new families, hard work, more houses, and more savings for retirement. Fewer old people mean less entitlements and health care costs.This is what the U.S. looked like in the post-WWII boom years.Mexico has a median age of 26. China has a median age of 33.2 — and China will age rapidly due to its one-child policy.Go South, Young ManThis is why companies are moving.Mexico grew GDP at a 4.7% clip in July, up from 3.7% in June.And get this: Unlike the U.S., Mexico has a budget!This is a Richard Fisher speech from the Federal Reserve Bank of Dallas from February 2012:On the fiscal front, it might surprise fiscal authorities in El Norte that Mexico actually has a federal budget! And it might surprise you to know that the U.S. government has not agreed on a budget for three years running.Furthermore, Mexico ran a budget deficit of 2.5 percent in 2011, compared with the U.S. figure of 8.7 percent. Mexico’s national debt is small, at 27 percent of GDP; in 2011, the U.S. debt-to-GDP ratio was 99 percent and is projected to be 106 percent in 2012 as the national debt passes $16 trillion.As you know, $16 trillion is receding fast in the rearview mirror.Since 2006, Mexico has had a balanced budget rule. Inflation has dropped from 43% a year in the 1990s to 6.3% in 2001 and 3.8% this year. The peso is now a store of value, no longer a punchline.As an example, the Mexican 10-year government bond now pays 5.25% — just off the all-time lows of 5% it hit in July.Bill Gross, manager of the world's biggest bond fund, is buying them up. According toBloomberg:Mexico’s lower debt levels and higher yields made investing in the nation’s bonds instead of German notes a decision so obvious to Gross that he ended his June comments on the Pimco Twitter account with the word “duh.”Next time, I'll tell you about another Mexican secret: gold.Lock and load,
Mexico: Investors’ New China
Here's one way to play this U.S.-tethered emerging market
Some forget that California, Nevada, Utah, a small part of Wyoming, Arizona, New Mexico, Colorado and Texas were actually part of our southern neighbor a long time ago. But apart from the serious immigration issues brought on by a huge land border, Mexico’s proximity to the U.S. — as well as intertwined cultural heritage — offer serious investment opportunities for believers in free trade.
Mexico is the only up-and-coming emerging market that has such close economic connection to the U.S. With a growing population of 108.6 million, Mexico sends 78.7% of its exports to America and gets 49.8% of its imports from here. The only other economy with such economic leverage to the U.S. is Canada, yet it is well-developed and has a completely different investment climate.
Organized crime is a serious issue, but the outgoing Calderon administration has done a lot to remove the bulk of the cartel leaders. If the next administration keeps up the pace, one can see the Mexican government prevailing in its war on the cartels. Corruption also is a serious issue, but isn’t that the case in China and India, too?
There has been a huge resurgence of manufacturing in Mexico as shipping across the border is easy, while hauling stuff half across the world from China actually costs more in an increasing number of cases. The surge in Chinese non-private urban wages — up 14.3% year-over-year in 2011 to 42,452 yuan (US$6,717) — is a major culprit for the shift. Chinese wages at privately held companies also grew 12.3% on an inflation-adjusted basis in 2011. Mexico, with an estimated 2012 GDP/capita of $10,514, is more developed than China ($5,899 GDP/capita), yet labor is no longer four times cheaper in China like it was 10 years ago.
The iShares MSCI Mexico Investable Market Index Fund (NYSE:EWW), which represents the benchmark MSCI Mexico IMI Index, is near an all-time high, while the mega-benchmark MSCI Emerging Markets index is not, and neither are the MSCI country indexes for any of the BRICs.
Also, at a time when Spain-based Santander (NYSE:SAN) is under serious pressure, the recent IPO of its locally funded Mexican subsidiary saw strong investor interest and was priced at a valuation multiple much higher than that of the problematic parent. The Mexican economy’s leverage to the U.S. used to be singled out as a weakness, but with the European situation and China slowing down, it has turned into a strength.
Many U.S. companies have taken notice and increased operations there. Costco (NASDAQ:COST) recently bought out its Mexican joint venture partner, in effect doubling its stake in the country. Walmart (NYSE:WMT) has had great success with its separately incorporated subsidiary Walmart de Mexico (PINK:WMMVY), and AutoZone (NYSE:AZO) also has successfully expanded there.
Still, playing Mexico with U.S. companies is more difficult thanks to the much smaller size relative to the U.S. economy. Walmart de Mexico is different, as it actually is a separate, $52 billion company controlled by Walmart with pink sheet-traded ADRs in the U.S.
WalMex, as the company often is called, grows faster than Walmart as it is smaller and disposable incomes in Mexico also grow faster. In the 2001-11 period, WMMVY showed a 15.9% compounded annual growth rate (CAGR) of sales, an 18.8% CAGR of EBITDA, and 17.5% shareholder return CAGR. There were serious bribery issues that hit shares earlier in 2012, but permit problems are not solely a Mexican issue.
WalMex is the lowest-cost major retailer in Mexico, and in a way, it is duplicating its strategy from the U.S. by also operating standalone supermarkets that take out inefficient small shops in the country. This matters to Mexican consumers as food is a much bigger component of their disposable incomes.
In the latest reported quarter, WalMex had MXN $87.3 billion in sales from Mexico with MXN $13.6 billion coming from adjacent Latin American countries. Total WalMex return on invested capital (ROIC) is an industry-leading 19%. (WalMex management conveniently includes ROIC for Costco and Target (NYSE:TGT) of 12% and 11%, but forgets to include the WMT ROIC, which likely is lower based on the comparison of other profitability metrics).
Mexico seems to have made a turn for the better, and despite its numerous problems, the environment is changing and its stock market has noticed. Since the country is less developed than Brazil, Argentina or Chile on a GDP/capita basis and is less exposed to China and Europe than any other major emerging markets, that outperformance is likely to continue.
Ivan Martchev is a research consultant with institutional money manager Navellier & Associates. The opinions expressed are his own. Navellier & Associates holds positions in AutoZone, Costco, Target, and Wal-Mart for its clients. This is neither a recommendation to buy nor sell the stocks mentioned in this article. Investors should consult their financial adviser prior to making any decision to buy or sell the aforementioned securities. Investing in non-U.S. securities including ADRs involves significant risks, such as fluctuation of exchange rates, that may have adverse effects on the value of the security. Securities of some foreign companies may be less liquid and prices more volatile. Information regarding securities of non-U.S. issuers may be limited.
This post was edited by 29042012 at 2012-11-28 20:23
Mexico and the Philippines have many things in common:
Christian, democratic, Spanish heritage, English as second language, etc.
Both are ready to take over the position of China as workbench of the world.
29042012 Post time: 2012-11-28 21:13 static/image/common/back.gif
Mexico and the Philippines have many things in common:
Christian, democratic, Spanish heritage, Eng ...
I think wages in Mexico are far too high to take over the cheap production items from China. What people often forget, Mexico is much more expensive than China. The cheap Charlie jobs will probably go to B. Desh, India, Cambodia, Vietnam and perhaps the Philippines but Mexico is already in another category.
....and before I forget it, real capitalists don't make decisions based on religion. ;P and neither do they make it based on language. They do it on such "unimportant" matters as salaries, skill, education, infrastructure and political stability. The rest, forget about it.............. This post was edited by 29042012 at 2012-11-28 21:24
Wages are "lower" than in China.
You must read the article.
Why you never follow my advice to read before you post ?
Not to mention Vietnam and ofcourse Myanmar !
China's days as the only investors choice are counted. Some interesting comparisons.