Investing in Mexico: Latin America’s Next Largest Economy
Companies / Mexico Nov 02, 2012 - 11:50 AM GMTBy: Investment_U
Mike Kapsch writes: I’ve noticed people go to great lengths to travel the world, but inexplicably ignore sites in their own backyard.
Take me, for example.
I have lived in the United States for over 25 years.
And while I have visited a total of 23 states and other foreign countries, I have never been to Mexico. It’s not like I haven’t had the opportunity…
I’ve just always taken a pass. Admittedly, I’ve been a bit spooked by all the headlines on border, drug and gang violence.
This type of thinking is unfortunately keeping many investors away from Mexico – a big mistake.
Because while Mexico’s challenges make headlines, its strengths are making money for investors.
Already this year, Mexico’s Stock Exchange, the Bolsa Mexicana de Valores, has been the second-best performing stock market in the world, lagging only Germany’s.
And over the past 12 months, its stock exchange is up roughly 20%.
But this could be just the beginning of something even bigger…
As Nomura Holdings (NYSE: NMR) analyst Benito Berber relayed in a recent report, “In the next decade, Mexico is likely to become [Latin America’s] largest economy and one of the most dynamic among emerging markets.”
In this report, you’ll discover exactly what two industries are set to benefit from Mexico’s continued growth. You’ll also see how you can gain access to some of Mexico’s best companies right here in the United States.
Let’s get right to the details…
Industry #1: An Emerging Manufacturing Superpower
For years, China has always been the go-to place for outsourcing, especially when it comes to manufacturing.
According to a JP Morgan (NYSE: JPM) study, in 2002, Chinese workers earned half of what Mexican workers earned at that time.
Today, however, because of rising Chinese wages, they earn just 12% less than Mexican workers.
In fact, in just the last two years, 200 Chinese companies have expressed interest to the Chinese government that they’d like to move their operations to Mexico to save on costs.
In addition, companies in 41 different countries are also looking to set up multi-million and -billion dollar manufacturing facilities in Mexico right now.
Italian tire maker Pirelli is just one example. It’s looking to set up its first-ever plant in Mexico as you’re reading this.
Other companies building or planning to open new plants in Mexico include…
- Audi
- Volkswagen
- Honda
- Whirlpool
- Chrysler
- Hershey
- Mazda
- Rolls-Royce
- Ferrero
- Nissan
The list goes on and on…
You see, Mexico’s competitive advantage is being supercharged by a weak peso policy that has pushed the peso down an unbelievable 1,500% against the U.S. dollar since 1987.
Not to mention, Mexico also has more free trade agreements with other countries than any other nation in the world. This explains why Mexican exports hit a record high in April of this year.
It also explains why American, European, Japanese, South Korea and, yes, even Chinese companies are practically falling over each other to invest in Mexican production facilities.
So who’s best set to gain from this rapid increase of manufacturing in Mexico?
Look no further than Mexican construction companies.
If companies from all over the world are coming to Mexico to build new manufacturing facilities, who do you think they’re going to have to do business with to make their new manufacturing facilities a reality?
That’s right, construction companies with an established reputation in Mexico. And Mexico itself will also need to build out the proper infrastructure to support new facilities.
In fact, we recommended a company by the name of Empresas I.C.A., S.A.B. de C.V. (NYSE: ICA) in Investment U Plus on June 6 of this year. Since then, Plus subscribers have had the opportunity to cash in gains as high as 51%.
Empresas is Mexico’s largest construction company and has been business for over 60 years. For the last three years, the company’s backlog has remained at record levels.
But just recently, our very own Global Equities and Emerging Markets Specialist, Carl Delfeld, recommended taking a look at Grupo Simec S.A.B. de C.V. (NYSE: SIM).
Simec provides the finished steel that goes into manufacturing plants being built hand over fist by global companies taking advantage of Mexico’s edge. In the last six months, the company has gained a full 40%.
But there’s still plenty of room to run. That’s because the company is still trading barely above its book value and at only 2.41 times forward earnings.
Yet, this is just one of two industries set to benefit from Mexico’s growing presence in Latin America.
Industry #2: The World’s Most Energy Secure Nation
According to a recent report from the U.S. Chamber of Commerce, believe it or not, Mexico is actually the world’s most energy secure nation among the 25 largest energy-consuming countries.
Even more unbelievable, except for a few years in the early 2000s, Mexico has consistently been the most energy secure country for the past 30 years running.
The trouble for investors, however, is that investing in Mexican energy isn’t the easiest thing to do.
Petróleos Mexicanos, or Pemex, is Mexico’s largest enterprise in terms of total sales, assets, personnel employed and tax payments.
Not only does the company fuel Mexico’s cars, it represents 40% of the Mexican government’s revenue. It’s undoubtedly one of the world’s largest petroleum companies, as well.
But it’s state-owned by the Mexican government. Therefore, it doesn’t have shares that trade on a public exchange like the companies previously mentioned.
How can you possibly benefit from Pemex without actually being able to invest in the company?
It’s actually pretty simple.
Pemex works with many companies to help make its operation run smoothly.
For instance, Pemex just awarded McDermott International Inc. (NYSE: MDR) a $50-million contract to build three pipelines to help transport its oil from offshore to onshore.
More opportunities are opening up, as well.
As Bloomberg reports, in Mexico, “Oil reform in 2008 opened exploration and production projects to private and foreign companies for the first time since 1938… Morgan Stanley is preparing to invest millions of dollars in Mexican energy companies as the nation opens up the industry to private capital and state-owned oil producer Petróleos Mexicanos boosts spending to a record.”
Just last year, Schlumberger Limited (NYSE: SLB) and its partner Petrofac were awarded the rights to develop Northern Mexico’s Panuco Field, one of six properties being auctioned off by Pemex.
In the first quarter of 2012, the company announced revenue of $10.61 billion, up from $8.72 billion in the first quarter of 2011. The company even largely contributed its growing numbers to offshore production and exploration in Mexico and the Gulf of Mexico.
The Bottom Line
Mexico still exports 80% of its goods to the United States.
Yet, being so close the world’s largest economy hasn’t necessarily been much of a burden.
Last year, Mexico earned $277 billion exporting goods to the United States. And that number is set to only increase now that doing business in Mexico is arguably even cheaper than in China.
You see, what could take month to receive goods from China, only takes a few days from Mexico. There are no trade wars to worry about, no tariffs, no fees.
Add in the fact that Mexico currently has 43 other free trade agreements with other nations, the most out of any country in the world, and you can see why there may be no better opportunity than right now to cash in from Mexico’s budding global presence.
Good Investing,
Mike
by Mike Kapsch, Investment U Research
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