In Mexico, It Really Is the Economy, Stupid
Equity investors have bid up the value of Mexican stocks by 20% since last July. This matches the gain for the S&P and leaves broader emerging markets in the dust.
The Mexico we mostly see in our media is a teeming, teetering state whose most notable products are drug violence and illegal immigrants. President Obama flew to Mexico City yesterday trying to shift the focus to the country’s economic achievements and promise, but the press back home was having none of it.
The Washington Post spun Obama’s embrace of telegenic Mexican counterpart Enrique Pena Nieto as a ploy to push immigration reform on Capitol Hill. The New York Times lede bore in on the two presidents’ determination to “avoid engaging each other on the two most delicate, contentious issues between their countries: immigration overhaul in the United States and Mexican efforts to confront drug violence.” The LA Times did actually devote a few sentences to the Mexican economy, concluding: “The portrait of Mexico ‘on the rise,’ as a US official puts it, is disputed.”
Disputed by whom, exactly? Not by equity investors, presumably. They have bid up the value of Mexican stocks by 20% since the 46-year-old Pena Nieto was elected last July, as measured by the popular iShares MSCI Mexico ETF (NYSEARCA:EWW). That matches the gain for the S&P 500 (INDEXSP:.INX) and leaves broader emerging markets in the dust. The iShares S&P Latin America 40 Index Fund (NYSEARCA:ILF), for instance, has gained about 9% over the same time period. (Mexico has a long interregnum, so Pena Nieto actually assumed office only in December 2012.)
It would be hard to quibble with Mexico’s numbers, too. Economic growth has been chugging along at 4% or so for the past four years – way outpacing Brazil, which is supposed to be the regional powerhouse, not to mention the good old USA. Public debt is an enviable 35% of gross domestic product, inflation is a calm 3.6%. Industry accounts for a muscular 34% of the Mexican economy compared to 18% for the US.
And the outlook is for better times ahead. Mexico’s attractions for US goods producers are only increasing as costs and labor frictions rise in China. Much of the vaunted rebound in US manufacturing may actually turn into “near-sourcing” in northern Mexico, which is of course linked to El Norte by the Clinton-era North American Free Trade Agreement. A survey taken late last year by consultant AlixPartners found that 50% of firms that were contemplating relocation from China were mulling Mexico as an alternative, compared to 35% for “onshore” USA.
Inside Mexico, Pena Nieto was elected as a pragmatic economic modernizer, and shows signs of delivering. He has already taken on one enormous special interest that was stifling the Mexican economy, Carlos Slim’s telecommunications empire, and has his sights set on the granddaddy of them all, state oil monopoly Pemex. This icon will not be privatized any time soon. But the new leader is looking to claw back its reach, opening Mexican hydrocarbons to alternative investors who could theoretically give a jolt to production and the national coffers.
Pena Nieto is also quietly rethinking the madness of getting tens of thousands of Mexicans killed in America’s hopeless drug war. He has significantly pared back US law enforcement’s access to Mexico, presumably one of those subjects he and Obama agreed not to air at their post-summit press conference.
There is one tactical dilemma attached to buying a little Mexico: It is hard to invest in the country writ large without getting exposure to zillionaire Slim’s besieged America Movil (NASDAQ:AMOV), the largest Mexican company by far with a US ADR listing. The $3 billion iShares MSCI fund is pretty much the only game in town for Mexican ETFs, and America Movil represents 18% of its underlying shareholdings.
The fund was in fact soaring ahead of the S&P until early February, when analysts began to take seriously Pena Nieto’s threat to trust-bust America Movil, which controls 70% of the Mexico’s cellular market and 80% in fixed-line. The president duly laid out his plan in early March and it was passed by the Mexican senate a few days ago.
That is all good policy for Mexico – the Slim monopoly costs consumers and businesses $25 billion a year in gouged prices, according to the Organization for Economic Cooperation and Development – but of course bad for America Movil’s bottom line. The shares have lost 15% since Feb. 5, and the broader Mexican market has treaded water since then.
However, it looks like the bad news might be priced into America Movil at this point. The stock bottomed out in mid-March and has limped back a bit. Otherwise investors could bet directly on other Mexican companies traded on US exchanges. The two most solid lately have been cement maker Cemex (NYSE:CX), which between the upturn in US housing and the Pena Nieto bounce has nearly doubled since last July, and top domestically-owned bank Grupo Financiero Banorte (OTCMKTS:GBOOY), which has gained 47% over the past 10 months. One international company with heavy Mexico exposure is Spanish bank Banco Bilbao Vizcaya Argentaria (NYSE:BBVA). Its shares have gained 38% during the young Pena Nieto era.
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