Mexico Vs. China: Investing Risks And Rewards

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Includes: EWW, MEXS, MXE, MXF
by: Stocks & Shares

Mexico appears to be more attractive for value investors than China. Unfortunately, you wouldn’t know it from listening to the financial media. Independent of investment prospects, media attention is drawn to the possibility and extent of a slowdown in China’s economy, which almost seems to exclude coverage of other developing markets.

How can we compare the risks and rewards of investing in Chinese stocks and Mexican equities?

To examine the investment prospects of different foreign markets, different markets were screened for discounts to Purchasing Power Parity (PPP) of their currencies versus the dollar. To assess the risk of investing in nations with the cheapest currencies, Investment Freedom and Property Right scores were collected from The Heritage Foundation’s 2011 Index of Economic Freedom. Each metric helps weigh risk or value:

The Investment Freedom score assesses restrictions on foreign and domestic investment, legal recourse available to firms and investors, as well as how burdensome regulations are for investors. Higher scores indicate higher freedom, and 100 is the highest score.

The Property Right score assesses how well the government protects private property, how well the government punishes those who unlawfully confiscate private property and corruption in the court system. Higher scores indicate greater property rights, and 100 is the highest score.

Purchasing Power Parity is a relative price level that would allow a customer to buy the same amount of a good domestically as they could by exchanging domestic currency for foreign currency and then buying that good in a foreign country. Simply put, if PPP holds I would be able to buy the same amount of gas in the US as I could in Mexico, either by paying X dollars in the US or exchanging X dollars for Y pesos and then buying the gas in Mexico. Since currencies deviate from PPP, investors could convert dollars into a currency with a discount relative valuation and buy more assets in the foreign market than they could with dollars in the domestic market.

A table of discount currencies and risk scores reveals Mexico is a better value prospect than China:

Currency

Relative Valuation

Investment Freedom

Property Rights

Indian Rupee

-63.2%

35

50

Pakistani Rupee

-60.3%

40

30

Egyptian Pound

-56.7%

65

40

Ukrainian Haryvnia

-50.6%

20

30

Sri Lankan Rupee

-50.5%

30

40

New Taiwan Dollar

-45.5%

65

70

Thai Baht

-43.9%

40

45

Polish Zloty

-43.0%

65

60

Philippine Peso

-42.7%

40

30

Argentina Peso

-41.2%

45

20

Malaysian Ringgit

-41.2%

45

50

Hungarian Forint

-40.8%

75

65

Peruvian Nevo Sol

-40.6%

70

40

Mexican Peso

-38.2%

65

50

New Turkish Lira

-36.6%

70

50

Indonesian Rupiah

-35.7%

35

30

Chinese Yuan

-35.7%

25

20

US Dollar

0.0%

75

85

There are many attractively-priced funds which invest in Mexico’s securities:

Ticker

Name

Type

Fees

Discount

P/E*

P/B*

EWW

iShares MSCI Mexico Investable Mkt

ETF

0.52%

-0.06%

15.6

1.48

MEXS

Global X Mexico Small-Cap

ETF

0.69%

-6.40%

10.02

1.01

MXE

Mexico Equity and Income Fund

CEF

1.51%

-9.95%

14.48

2.22

MXF

The Mexico Fund, Inc.

CEF

1.47%

-8.66%

15.92

1.15

*P/E and P/B ratios are forward projections calculated by Morningstar.com.

US investors could invest in Mexico through two discounted close-end funds (CEFs): the Mexico Equity and Income Fund (NYSE:MXE) which trades at a 9.95% discount to net asset value (NAV), and The Mexico Fund (NYSE:MXF) CEF which trades at a 8.66% discount to NAV. These discounts stack with the cheapness Mexico’s currency, making these funds even more attractive.

Alternatively, MEXS is an exchange-traded fund whose holdings are attractively valued. MEXS provides an investment opportunity into small caps at lower valuations than the more popular large cap indexes. The low valuation of this ETF portfolio stacks with the current cheapness of the Peso.

Each of these three funds is an attractive candidate for further research and small investment allocations. These vehicles are opportunities to gain from a market with better property rights, higher investor freedom, and a cheaper currency than China.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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