Wednesday , 13 December 2017


Move Over China: Competition From Mexico is Growing Rapidly – Here's Why

Import Prices

Efficiency related to manufacturing is a critical factor when yuan appreciation has led to rising cost of imports from China. The import price index for China has trended higher in the last three years, while the index for manufactured imports from Mexico has declined during the same period.

Import price index for China and Mexico

Wages

Mexico stands to benefit from the cost advantage over China…The chart on wages in China and Mexico also points to gradually increasing wages in China.

Wages in China and Mexico

Foreign Direct Investment

[Given the above,] it is not surprising to see U.S. companies investing heavily in Mexico. U.S. companies have invested USD145 billion in Mexico since the year 2000….In fact 50% of the foreign direct investment (FDI) in Mexico (2000-2011) comes from the United States.

(click images to enlarge)

FDI in mexico

Geographic Proximity

Besides the competitive wage advantage, geographical proximity brings down logistics cost significantly when compared to imports from China.

NAFTA Benefits

The benefits of trade within NAFTA (North American Free Trade Agreement) should also not be ignored.

Healthy Reserves

The evidence of a growing competitiveness and higher exports comes from total reserves (excluding gold) for Mexico. Reserves have swelled to USD156 billion as of June 2012.

Mexico Reserves

Low Debt-to-GDP Ratio

With a low debt to GDP ratio of 27% and an increasing reserve, there is ample headroom for infrastructure development. This, in turn, will attract more foreign investments.

Rich in Oil and Gas

It is also important to note that Mexico is an oil rich country. In 2012, Mexico and United States reached an agreement on regulating oil and gas development along their maritime border in the Gulf of Mexico. This development will open up more than a million acres of deepwater drilling according to the New York Times report. This is beneficial for both partners in the long-term…

Investment Options

1. iShares MSCI Mexico Investible Market Index Fund (EWW) – The ETF seeks to replicate, net of expenses, the MSCI Mexico Investable Market index. The index consists of stocks traded primarily on the Mexican Stock Exchange. The largest holdings of the ETF are in the consumer staples, telecommunications and materials industry. The top holding of the fund is America Movil S.A.B. de C.V. (AMX). The expense ratio for the ETF is 0.52%.

One of the risk factors for the fund is its high beta of 1.62 when compared with the S&P 500 index. Therefore, the fund might be subject to a high degree of volatility. The volatility factor might not be very important for investors considering long-term exposure to the ETF. Over the long-term, the fund will trend higher with improving economic fundamentals in Mexico.

2. Grupo Simec S.A.B. de C.V. (SIM) – The company is engaged in manufacturing, processing, and distribution of special bar quality (SBQ) steel and structural products primarily in the United States, Mexico, and Canada. SIM’s structural steel products are mainly used in non-residential construction market and other construction applications. From that perspective, the impact on growth due to a weak housing market is minimized. At the same time, the risk related to being in a cyclical industry cannot be completely ignored.

SIM currently trades at an attractive PE (TTM) of 6.18 and can give reasonable returns in the long-term. Investors can consider some exposure to the stock in their long-term equity portfolio.

Conclusion

Mexico…is one of the most attractive investment destinations in the world for the U.S. given its good relations with the United States, geographic proximity, increasing competitiveness of its manufactured products vis-a-vis those from China, low government debt, fairly low inflation and robust foreign direct investment. [Move over China!]

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*http://seekingalpha.com/article/812991-mexico-to-benefit-from-u-s-china-tensions-and-rising-wages-in-china (To access the above article please copy the URL and paste it into your browser.)

Editor’s Note: The above post may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.

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