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Mexico: The China of the Americas

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While investors talk about BRICS, PIIGS, Tiger Nations, and other dynamic developing economies, few have looked into the story going on just south of the US border.

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Mexico is a country I've dubbed the "China Next Door" for its emerging manufacturing prowess. I've chosen the iShares MSCI Mexico Investable Market Index (EWW) as my latest featured recommendation.

In fact, I think manufacturers setting up in Mexico just might be the most under-reported mega trend in global investing.

Want proof? Just go to your nearest Wal-Mart and I bet you'll find a lot more goods that say "Made in Mexico." With Chinese wages exceeding those in Mexico, the conventional wisdom - that China is the place for inexpensive manufacturing - no longer holds true.

Suddenly, a whole host of Mexico's other advantages make Mexico a much more attractive place for US companies, in particular, to do business. For one, Mexico's location is ideal for US companies. The average transit time from the moment a shipment departs China to the time it arrives in the United States is 30 days. From Mexico, delivery times range anywhere from a few hours to a few days.

Mexico's geographic location offers several other benefits. US companies can maintain "just-in-time" delivery schedules, reducing costs by shrinking their inventories. Due to difficulties in predicting demand, US manufacturers in China are often forced to warehouse manufactured products for longer periods. And that means unexpected costs.

Unlike China, Mexico allows its currency to "float" in world currency markets. This has resulted in a significant depreciation in the value of the Mexican peso. Put another way, Americans currently pay 30% more for Chinese products and 40% less for Mexican products, compared to 2007. No wonder manufacturers are scrambling to set up operations in Mexico.

Although you'd be hard-pressed to conclude this from the headlines recounting the latest drug killings, Mexico's legal system is actually quite favorable to US and foreign investors. Since joining NAFTA in 1994, Mexico's trade with the United States is duty free. In contrast, duties and tariffs imposed on Chinese products imported to the United States on both finished goods and raw materials hike costs above comparable Mexican products.

Mexico also has international trade agreements with 44 different countries. That means companies can open manufacturing plants and source materials from a wide range of countries and avoid hefty duties.

The enforcement of intellectual property rights in China is a serious problem for Western manufacturers of all stripes. In contrast, Mexican courts typically enforce companies' rights to intellectual property. Mexico also has relatively strict environmental laws, reasonable health and safety monitoring and inspections, and strong child labor laws.

Even while much of the global economy struggles, Mexico has been doing just fine, thank you. In early 2012, Mexico's Gross Domestic Product (or GDP) grew at an annual rate of 4.6%.

The recent electoral triumph of Peña Nieto on July 1 and the return of the pro-business Partido Revolucionario Institucional to power has also made Mexico an increasingly attractive destination for foreign investments.

The iShares Mexico Investable Market Index Fund replicates the MSCI Mexico Investable Market index, and consists of stocks traded primarily on the Mexican Stock Exchange. This ETF has already risen 15.9% this year.

Nevertheless, there is plenty of upside left in the Mexican market - particularly if the newly elected president Peña Nieto and his government enact market-friendly economic reforms.

Editor's Note: This article was written by Nicholas Vardy of The Alpha Investor Letter.

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No positions in stocks mentioned.
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