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Like many other emerging markets, Mexico has been caught up in a period of exchange-rate depreciation. Its currency, the peso, is down roughly 16% versus the U.S. dollar over the past year. The world’s most heavily-traded emerging market currency is trading near its lowest level since the 2008-2009 financial crisis.
And thanks to the steep decline in oil prices and a sluggish U.S. economy, Mexico’s economy should grow only in the 2.5%-3% range this year.
That is far better, though, than other major economies in Latin America. Take Brazil, for example. This year it is expected to go through its worst recession in 25 years.
Reform Agenda
Conditions in Mexico aren’t as bad as during the financial crisis. Far from it.
President Enrique Peña Nieto is pushing forward his reform agenda. His telecommunications reform has resulted in lower prices for consumers, and reforms in the energy sector are opening it to investments by the major oil companies.
The latter reforms should inject fresh blood into a sector dominated by state-owned Pemex since the energy assets were nationalized by Mexico in 1938. The new players in Mexican energy will likely stem the decline in oil production within a few years.
These economic reforms by Nieto are distinctly different than the norm in emerging economies.
Ian Bremmer, founder of Eurasia Group, told Forbes contributor Nathaniel Parish Flannery, “The orientation toward fixing the economy is there. Most emerging market economies aren’t oriented toward improving competitiveness, they are simply working to meet the needs of their constituents with populist policies.”
Mexican Vehicle Export Machine
Nieto is also looking north of the border to the U.S. economy for help in his efforts to move the nation’s economy forward. That’s because exports – largely to the U.S. – account for nearly a third of Mexico’s gross domestic product. Many of these exports are centered in manufacturing, with one sector in particular leading the way.
That sector is automobile manufacturing. An interesting fact was brought to light by the Financial Times: In 2013, Mexico surpassed China as the No. 1 nation in foreign direct investment for auto manufacturing.
There are several reasons behind this new reality in the global automotive sector. One is the fact that wages for unskilled labor in auto plants have risen much more sharply in China than wages for similar workers in Mexico.
Also, Mexico has a lot more free trade agreements than China. That, of course, includes the North American Free Trade Agreement (NAFTA), which allows exports into the U.S. duty-free. Add to that a solid infrastructure, particularly in transportation, and it’s easy to see why Mexico is becoming a vehicle manufacturing hub.
As the CEO of Mazda in Mexico, Keishi Egawa, told Bloomberg, “Mexico is one of the most attractive manufacturing locations (in the world).”
Auto Manufacturers Piling In
In little more than a year, a number of global vehicle manufacturers have opened new Mexican factories or have plans to do so. Others vehicle makers have added to their capacity in Mexico.
The list is a veritable who’s who of the automotive world. It includes the likes of BMW (OTC: BAMXY), Mazda Motor Corp. (OTC: MZDAY), Nissan Motor Co. (OTC: NSANY), Volkswagen AG (OTC: VLKAY), Toyota Motor Corp. (NYSE: TM), Fiat Chrysler (NYSE: FCAU), General Motors (NYSE: GM) and Ford (NYSE: F).
The money being invested is quite impressive too:
- Ford – $2.5 billion
- Toyota – $1 billion
- Volkswagen – $1 billion
- Mazda – $770 million
All told, since the Nieto presidency began there has been about $20 billion invested by automakers and auto parts manufacturers. Mexico is also the world’s sixth largest manufacturer of auto parts. The country had an estimated $81.5 billion in sales in 2014.
The bottom line of all this investment is that, by 2022, Mexico will produce 25% of all light vehicle production in North America. That’s up from a mere 3% in 1985.
Mexican Equities
This growing manufacturing prowess bodes well for future growth in the Mexican economy.
How to best play this expected economic growth? I’d stick with Mexico-focused investments.
My favorite way has nothing to do with autos. It is a company called Gruma (NYSE: GMK), a global leader in corn flour and tortillas. Its best-known brands in the U.S. include Mission and Maseca.
In March, the company was upgraded to investment grade by Standard & Poor’s. S&P raised its rating from BB-plus to BBB-minus due to the company’s strong profitability and lower debt.
Gruma’s stock is up 188% over the past two years.
Gruma (NYSE: GMK) Stock Performance
Source: EDGAR Online
For a broader-based Mexican equities play, one could look at the iShares MSCI Mexico Capped ETF (NYSEArca: EWW). This ETF, over the short term, will be buffeted by economic headwinds like a weak peso. But it is still a good long-term way to play the growth of Mexico’s economy.
Either way, U.S. investors should not forget about the emerging market growth story south of the border.
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