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Mexico on the Rise, China and Brazil Slowing
Corolla Financial sees promise in Mexico: Mexico seeing an upturn as China's economy slows and international investors look to hedge their bets.
After China joined the World Trade Organization in 2001, Brazil boomed due in large part to China’s endless need for soybeans and iron ore. Over the same period, Mexico's manufacturers struggled to compete with cheap Chinese goods and lost out on cost loosing manufacturing contracts primarily in the United States. Brazil has grown almost twice as fast as Mexico in the last decade and overtook its northern rival as Latin America's biggest economy in 2005, becoming a darling of investors and attracting international attention winning bids for the world cup and Olympic Games.
Recently China has experienced slowing of their breakneck growth and Brazil has also slowed. These developments are prompting some investors to take another look at Mexico's strong ties to the United States and the chance its new president will undertake major reforms that could stimulate growth in the manufacturing sectors.
Over the first half of 2012, foreign investors have injected $3.4 billion into Mexico's stock market compared with $2.9 billion in Brazil. That is a very strong indicator as the commodity-heavy Bovespa index of the Sao Paulo stock exchange has a market capitalization about three times greater than Mexico's IPC .MXX, which is more skewed to local consumption.
Many, including analysts at Corolla Financial still expect Brazil to rebound given record low official interest rates, a raft of government initiatives to boost growth and an expected wave of infrastructure spending ahead of the 2014 World Cup and Olympics Games of 2016. Independent of Brazil, it is becoming clear that Mexico is on the rise.
Mexico's export growth caught up with China's in 2010, when the country also began to win back some of the U.S. market. It now has a record 12.9 percent share of goods imported by the United States, just short of China. Finance ministry officials point to a narrowing wage gap in manufacturing as Chinese labor becomes more costly. In 2007, hourly Mexican manufacturing wages were 238 percent higher than in China, but are now just 7 percent higher.
As well as proximity to the United States, Mexico also enjoys strong patent protection. Barclays Capital also says that specialization in high-value sectors such as autos and telecommunications equipment has helped manufacturers gain an edge over China.
Additionally, Mexico has a particular advantage in bulky goods, which can take four to five weeks to ship from China. The country is the world's biggest exporter of flat screen TVs, the second-biggest exporter of two-door refrigerators and freezers and the fourth-biggest exporter of cars, according to government data, while the aerospace industry is also growing rapidly.
Many foreign investors are also gravitating towards Mexican fixed-income markets as a way to protect portfolios against risk from China and leveraging Mexico's links to the United States by holding Mexican bonds.
In contrast with Brazil's strong commodity weighting, Mexico's IPC stock index is composed two-thirds of consumer stocks such as telecommunications, retailing and beverages. The index is up nearly 9 percent in 2012 and is heading for record highs compared with a 7 percent gain for the Bovespa. Through August of this year, funds with an investment focus on Brazil returned an average 6.74 percent versus an average 8.17 percent return for funds focused on Mexico.
The buying has made Mexican shares expensive compared with Brazilian stock. As of Friday, the MSCI Mexico index was trading at 16.5 times forecast earnings and the MSCI Brazil index was trading at 10.4 times, which indicates market confidence in Mexico and potentially good value in Brazil.
While Corolla Financial analysts see great promise in Brazil and China, Mexico is a rising star that should not be ignored.