How To Play The Growth In Mexico

| About: iShares MSCI (EWW)
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Mexico is a leading player in the new acronym MIST, coined by Goldman Sachs to identify a new class of emerging economies whose demographics and favorable business environment position them to be the next bloc of high growth economies. Goldman Sachs favors Mexico over Brazil for obvious reasons. Mexico's economy grew at ~4% as compared to Brazil's 2.7% in 2011. China's rise in the international scene, and the concomitant demand for commodities in the country, was a boon for the commodity-rich Brazilian economy and a bane for Mexico. Now, with China struggling to regain its lost momentum, Mexico can and has partly risen to the occasion with its low cost manufacturing, low public debt, low inflation (3.3% in 2011), and large labor force of 46 million, more than half of which are under the age of 26.

The Mexican economy is chiefly being driven by foreign investment and exports. Historically and currently, Mexico benefits from being in proximity to the world's largest consumer market -- i.e., the U.S. (78% of total exports head towards the U.S.). Yes, 78% is a high figure, but the number is actually declining (it was 89% in 2000) with the passage of time, as Mexico looks to diversify in Asia and the rest of Latin America. Mexico has become the No. 1 manufacturer of televisions, and houses the eighth-largest automotive industry in the world (VW's car plant in Puebla is the largest in North America). While investors decry numerous hurdles to business operations in Brazil and elsewhere, the World Bank ranks Mexico as one the easiest destinations to conduct business in. It ranks at 54, ahead of Brazil (126) and Argentina (113). The ease can be gauged by the fact that it only takes nine days to register a business in Mexico.

However, Mexico cannot be completely independent of the U.S.; the speed of the U.S. economic recovery will have an impact on the Mexican economy. As China's labor cost rises, manufacturing in Mexico's low cost environment becomes increasingly attractive. Hourly wages in Mexico are now only 7% higher than those of China, down from being 238% higher in 2007. It is no surprise that Sony (NYSE:SNE), General Motors (NYSE:GM), and Audi are investing in manufacturing bases in Mexico. Foreign direct investment stood at $19.4 billion in 2011, down slightly from the previous year's $20 billion, but has been on the rise since the slump in 2009 caused by the financial crisis. From the beginning of the year until July, investors poured $3.4 billion into the Mexican stock market, whereas only $2.9 billion was invested in Brazil.

Investors looking to benefit from the broad Mexican market exposure should consider the iShares MSCI Mexico Investable Market Index Fund (NYSEARCA:EWW), which seeks to provide returns that correspond to the returns measured by the MSCI Mexico Investable Market Index. The ETF has provided a year-to-date return of 21.62%. The ETF's largest holdings include America Movil SAB de CV (NYSE:AMX) (accounting for 22 % of total holdings), and is also a favorite of BlackRock (NYSE:BLK). AMX is a provider of wireless communications in Latin America, the Caribbean, and the U.S. American Movil stands to benefit from an expanding economy, as consumers seek items such as mobile phones. The stock has yielded a one-year return of 17.46%.

Another holding is Fomento Economico Mexicano (NYSE:FMX), a non-alcoholic beverages company that has market access throughout Latin America, as part of the Coca-Cola (NYSE:KO) system. The stock has yielded a one-year return of 48%. Analysts expect it to grow at 14% for the next five years, and estimate a price target of $94. Investors could also take advantage of the oligopolies, such as media giant Grupo Televisa (NYSE:TV). A low pay-TV penetration rate leaves ample room for growth in the sector. TV is engaged in the media and entertainment business in the Spanish speaking world. The stock yielded a one-year return of 27.15%. Analysts estimate a five-year growth rate of 15% and a price target of $25. At these levels, both stocks seem fairly valued in the market.

Mexico has managed to emerge as a booming economy, and despite the challenges faced by the country -- such as, for example, the drug cartels operating in Mexico -- the country has been a favorite for investors as they look for economies beyond the BRICs. We believe that Mexico has a favorable macroeconomic environment, and as companies pull their manufacturing operations out of China, Mexico offers them a safe haven.

MIST Performance

1-year Return


Mexbol (IPC)

9.47 %

16x (NTM)

Jakarta Stock Exchange Composite Index

10.59 %


Korea Stock Exchange Index (KOSPI)

9.07 %

11x (2012E)

Istanbul Stock Exchange National 100 Index (XU100)

32.27 %


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

Business relationship disclosure: The article has been written by Qineqt's Emerging Markets Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.