Investors looking to diversify a US-heavy portfolio often look to Europe or the emerging markets when branching out. With Western Europe still dealing with its own financial mess and the emerging markets lagging there is a country just south of the border that is often overlooked - Mexico.
Last week the central bank of Mexico cut their interest rate for the first time in four years to a record low of 4.0%. The 50 basis point cut was possible because inflation has been moving down to a level that the country feels is acceptable. The central bank believes inflation will move into the 3% range in the second half of the year, allowing the monetary easing to take place.
The stock market as measured by the iShares Mexico MSCI ETF (NYSEARCA:EWW) is up 22% in the last 12 months and hit an all-time high in early February. In comparison the SPDR S&P 500 ETF (NYSEARCA:SPY) is up 13% in the last year. Annual growth in Mexico was 3.9% in 2012, a better number than the U.S. and the once high-flying Latin American country of Brazil.
The signs point to a continued recovery for the Spanish-speaking nation and I feel there are investment opportunities investors need to start to recognize.
The Mexican ETF is a basket of 46 stocks based in the country with a strong emphasis on consumer staples, materials, and telecom. The three sectors make up two-thirds of the portfolio. The top ten holding are also heavily weighted making up 63% of the ETF with the top holding, America Movil (NYSE:AMX), accounting for 17%.
As mentioned above the ETF has outperformed most of its peers over the last year and was able to hit a new all-time high before the U.S., in early February. A recent pullback as the Dow hit a high could simply be a normal pullback and a buying opportunity. The ETF is currently 3% below the all-time high and sitting in the low-$70's it looks like a buying opportunity on weakness.
One easy way to find new ideas in Mexico is to look at the top holding of the Mexican ETF. The top holding, AMX, is the country's major telecom company with operations in Latin America. The stock has been under pressure and is trading near a 52-week low. Recent news of more regulation of the phone and TV market by the Mexican government is not helping matters. Even though the stock trades at a discounted PEG ratio of 0.77, it is not the time to try and pick a bottom for AMX.
The number two holding is Fomento Economico Mexicano (NYSE:FMX) is a different story as it has been hitting fresh all-time highs on a consistent basis until the recent pullback. The company is involved in non-alcoholic beverages, beer, and food retail in Mexico and other Latin American countries. Technically the stock is pulling back from an all-time high and is sitting on support at the $109 area and looking attractive. With a PEG ratio of 1.99 the stock is fairly valued, but valuations can continue to rise in this type of market and with the trend strong FMX could be a potential buy candidate.
Another top five holding for EWW is Cemex (NYSE:CX), the maker of cement and related construction materials worldwide. The company missed its recent earnings estimates in February, but still trades at a two-year high. The rebound in the U.S. housing market and the continued strength in the Mexican economy are two catalysts that could keep CX on the move higher. Earnings are expected to be negative again in 2013 before turning back into the black with estimates of $0.25/share in 2014. I would consider CX a risky play, but should continue to do well with a global economic rebound.
The biggest risk when investing in Mexican ETFs or stocks it actually its neighbor to the north, the U.S. Almost 80% of the country's exports go to the U.S. and therefore long-term growth in Mexico will be tied directly to an economic rebound in the States. I believe that modest growth will continue in the U.S. for at least another year, lowering the biggest risk to Mexico.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.