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By: Dan Watkins
In January of this year the theme of emerging markets became more of a primary investment rather than that of an alternative one. Many people ventured toward countries that have had rocket high growth over the last few years such as the BRIC countries of Brazil, Russia, India and China which received the preponderance of excitement in the emerging market approach.
Today, the BRIC countries have been challenged to maintain upward momentum. The simmering down of the
American market crisis and the expanding concerns for the Eurozone present a dilemma and are showing the
effects. The Institute of International Finance (IIF), a global association of financial institutions, says that “net
private capital flows to emerging market economies remain quite volatile and subject to disturbance from
the euro area”. According to the research, data capital flows fell in 2011 to $1.03 trillion from $1.09 trillion in
2010 and are expected to fall again this year to $912 billion before rising to $994 billion in 2013.
The woes of the Eurozone monetary crisis have influenced investors to move money out of country and to seek safe haven in securities markets elsewhere. Brazil, Indonesia, China as well as others are no longer experiencing upward momentum and are now even in decline or negative. However year after year, analysts continue to see strong signs of growth and long term prosperity in Mexico as many of the emerging markets troubles are not being seen in Mexico, in fact quite the opposite.
Brazil with its lucrative energy industry capitalized by the largest South American exchange, has attracted many investors to seek opportunities in Latin America. Brazil has enjoyed the influx of foreign investments and has gone further to encourage more interest from the North by recently lowering some of its staggeringly high tax penalties on returns and additionally allowing the shares of foreign instruments to take more of a part in portfolios of its domestic shareholders. “Investors are more cautious with Brazil,” Gustavo Mendonca, an economist with Oren Investimentos in Sao Paulo said this week. “The country has slowed very sharply and the prospects for long-term growth have gone downhill.”
Policy adjustments invite and attract investments, but many of these actions are late and under pressure by issues developing in other countries such as Spain. On the other hand, the opportunities for a rudimental Northern investor looking South of the Border to Mexico remain solid. A key factor with Mexico is that it has some of the most definitive metrics that provide the level of transparency needed in a volatile global market. Unlike Brazil, Russia, India or China, Mexico is directly tied to American monetary policy with a correlation that does not exist in other Emerging Market countries and not surprisingly is also growing alongside the American economy.
Is Mexico beyond ridicule and examination? Of course not, but to begin to understand the benefits of investing in Mexico for the short and the long term we should begin with how Mexico plays a key role as a member of NAFTA (North American Free Trade Agreement). The implementation of NAFTA along with close inter-country relationships, ties Mexico’s trade and currency valuation to that of the US and Canada. For example, in 2010 many believed the US would remain flat for the next two years, but we now see this was not the case. As a result of American performance, Mexico’s markets have also increased working in parallel a framework portfolio managers find affirmative.
Mexico has also maintained a weak peso over the last ten years. The Mexican peso has been priced at a competitive advantage with China. Currency rates have helped Mexico realize an economic boom that continues to rise since the 90’s. The move to NAFTA in 1994 could be the key contributing factor for Mexico’s 600 percent increase in sales to the US. With inflation no longer under control in countries like China and Brazil, analysts are discovering that Mexico’s policies have proven successful in weathering many global financial catastrophes.
Internally within the Mexican population there are more positive stories amidst the drug war violence that seems to take precedent in news stories. Wage gaps have narrowed drastically from 260 percent to 10 percent over the last six years. Unemployment have also held near 4 percent due to manufacturing expansion and perhaps because Mexico is in a high position as the seventh largest producer of oil in the world. In a report last week, the research firm Capital Economics predicts 0.8 percent increase in GDP for 2012, which is well beyond global averages.
Capital infusion into various areas of the Mexican economy is directly aligned with import and export success and trends through to the cash markets. “More investment means more jobs,” stated Pemex labor union leader and PRI Senator-elect Carlos Romero in an interview last month. At the high, Mexico averaged 90 percent of its export business with the US. As a bordering nation, Mexico sees the benefits of American exports, to the tune of $300Bn annually, compared to $100Bn with the more popular export darling, China. Today the United States represents 80 percent of Mexican exports as it has increased trade with other LatAm countries totaling $700Bn and this is expected to double within the next 10 years.
Peña Nieto, Mexico’s new President who takes office in December has stated his explicit interest in advancing Mexico’s markets even further and in particular Mexico’s oil market. “To add to the equation of the incoming presidency, who appears to be supportive of market transparency and reforms, the securities trading landscape in Mexico continues to mature with the incorporation of advanced technology, new asset classes, more listed companies, and the ease of participation,” stated Antonio Nava, Chief Executive Officer at Finamex.
The achievements made by Mexico’s capital markets may not be as apparent in the news as they are on the big board. The iShares MSCI Mexico (EWW), Mexico’s exchange traded fund, is up 14.09 percent as of mid-July beating the MSCI Emerging markets index which is up 0.7 percent, and it leads the iShares FTSE China (FXI) ETF which is down 7 percent. iShares MSCI Brazil (EWZ) down 11.3 percent and the Market Vectors Indonesia (IDX) is down 5.6 percent again making Mexico the clear winner in this year’s emerging market portfolios. “A number of our shares in Mexico are up 40 to 70 absolute percent change since we purchased them,” said Audrey Kaplan, a portfolio manager for the $523 million Federated InterContinental (RIMAX) Fund.
The boom in Mexico is appreciated because Mexico has not squandered its returns and can be seen as looking to immediately reinvest in the future. Interest rates remain high even as global and local inflation concerns of 4 percent prevail which is an echoing estimate by Mexico’s central bank. Mexico is holding a steady 3.8 percent inflation with many analysts predicting a further decline due to continued prosperity.
Mexico’s deficit is hovering around 35 percent of GDP which is a more than reasonable position for many countries and not just emerging markets. As a comparative measure, Great Britain, who less than a century ago, was the world’s richest nation, is now over 60 percent of debt to GDP. The results of restitution campaigns by the Mexican government, high trade outputs, an enormous future in energy production and inflows of capital investments all coincide. These factors have paved the way for the Mexican peso’s continued appreciation which is up 0.5 percent to 13.1579 in recent weeks and earlier this month in intraday trading to 13.1516 and pushing to 5.9 percent year-to-date.
“Casa de Bolsa Finamex, is the leading broker dealer for international firms looking to trade in the Mexican capital markets space, “ said Roberto Larenas, Chief Trading Officer at Finamex . “We have in place, a series of processes that have consistently simplified the servicing model of our international investors who require a tier one premium service when trading the Mexican market-place.”
As opportunities within the developed markets diminish, the Mexican marketplace is standing strong. As a top emerging market for the global investing community, particularly in Latin America, Mexico represents a substantial alternative to Brazil, home of the leading Latin American stock market. Mexico, although not a BRIC country, certainly has more promising economic stability and growth potential than some of the most mature economies. With a clear goal in sight, the local markets in Mexico continue to take measures that enhance liquidity in equities and derivatives trading which provide surety to its financial institutions and reach more investors abroad.
Finamex (Casa de Bolsa Finamex SAB de CV) is the leading provider of high-quality market access products for the Mexican stock markets. For more than 20 years Finamex has been a leader in the Mexican financial services industry consistently ranking as one of the best independent broker dealers in the country. Finamex services diverse participants globally such as institutional, corporate and professional investors, as well as financial supports services firms worldwide.
For more information:
Finamex Casa de Bolsa
Avenida Paseo de la Reforma 255,
Piso 4, Col. Cuauhtemoc
Mexico, DF CP 06500, MEXICO