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The Bullish Case for Mexico

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News from our neighbors down south this morning: Mexico’s central bank maintained its benchmark rate at 4.5% for a 16th straight meeting.

The bank, as Bloomberg reports, played down concerns that increasing global commodities prices could fuel inflation in Mexico, signaling that policymakers aren’t preparing to increase borrowing costs soon. The central bank also said in its statement that both domestic and external demand are improving and investment is showing clearer signs of growth.

The government forecasts the economy will expand around 4% this year.

For many, investing in Mexico might seem like a fool’s bet. After all, the headlines surrounding this country often sound terrifying, with news of mass-decapitations and Wild West gun battles.

Still, while President Felipe Calderon’s war against the drug cartels has created chaos, the country’s economy has proven much tougher than many thought and Mexico continues to look like a promising investment opportunity.

So says Frank Holmes of US Global Investors. The key to Mexico’s economy, he notes, is the US: Roughly 80% of Mexico’s exports are postmarked for here. So, as our economy recovers, so too does that of Mexico. In fact, Mexico’s total monthly exports have risen well off of their 2009 lows and are now at record high levels, exceeding those seen before the global recession.

Another key export for Mexico’s economy is people, says Holmes. Roughly 10% of Mexico’s population lives outside of Mexico, mostly in the US. Remittances, or money sent home from a foreign country, from these immigrants represent 3% of Mexico’s total GDP. A recovery in remittances has trickled down into Mexico’s retail sales: As of October, retail sales in Mexico posted a 4.4% year-over-year change—more than twice the level seen in July.

In the past 12 months, the iShares MSCI Mexico ETF (EWW) doubled the performance of the iShares MSCI Emerging Markets ETF (EEM), 30% versus 15%, respectively.

Read the Holmes’ whole post here.
POSITION:  No positions in stocks mentioned.