The emerging markets that we've come to know so well, the BRIC countries, are finally coming to an end -- at least, as emerging markets.
China and Brazil are moving away from having industrial economies and are becoming ever more consumption-driven. India continues to suffer from a depreciating rupee and a poor economy, and Russia remains an unpredictable political quagmire.
A paradigm shift in global industrial manufacturing is beginning to take place, and areas like Indonesia, West Africa and Latin America could emerge as the next bull markets for investors. As the U.S. economy rebounds, it will undoubtedly remain consumer-driven, which is good news for one country in particular.
The U.S. accounts for 78% of this country's exports, with the five largest U.S. import categories last year being electrical machinery ($56.8 billion), automobiles and parts ($53.5 billion), machinery ($42.3 billion), mineral fuel and crude oil ($39.9 billion), and optical and medical instruments ($10.4 billion).
Unlike the slowing growth in China, this country's GDP is expected to grow 4% in 2014. It represents twice the growth rate expected in the United States and beats the region's largest powerhouse, Brazil, whose growth is expected to be only 2.7% this year, the same as in 2011.
The country I'm talking about is Mexico.
Like other emerging-market currencies that have struggled this year against the relative rise in the U.S. dollar, the peso has dropped 7% against the dollar, but it remains higher than other Latin American countries. But make no mistake: The dollar is extremely likely to fall due to the Federal Reserve's quantitative easing (QE) programs, and Mexico's currency could be a temporary safe haven for investors when inflation finally rears its ugly head in the U.S. economy.
|Mexico's currency could be a temporary safe haven for investors when inflation finally rears its ugly head in the U.S. economy.|
The numbers in Mexico are encouraging. Inflation is a manageable 3.6%, public debt is just 35% of GDP, and industry makes up 34% of the economy. The average age of the population is 29, and wages are expected to be less than China's in the next five years, making Mexico a cheaper source of labor.
In addition, Mexican President Enrique Pena Nieto has made tremendous strides in improving the country's global outlook. He has pushed for labor reform, increased investments in the telecommunications sector, and recently led a change in the country's energy policy, which had long been a government monopoly. Nieto's plan of profit- and risk-sharing contracts should create a freer energy sector that could spur investment growth by an additional $13 billion per year and add as much as 2 percentage points to potential GDP growth.
Here are three ways to invest in the new dynamic Mexico:
A broad-based investment into the Mexican economy either through the iShares MSCI Mexico Investable Market Index (EWW) or the Mexico Fund (MXF) -- a favorite of StreetAuthority analyst Amy Calistri -- are good ways to establish a position. These funds not only have exposure to the manufacturing sector, but also to energy, health care and media -- sectors that are benefiting from political reforms and a growing Mexican middle class. The Mexico Fund has a powerful incentive for investors as well in the form of a hefty 10% dividend.
Grupo Televisa (TV) is a broadcasting company that is set to take advantage of growth in several areas. The increase in the United States' Hispanic population means there are 53 million potential users of Spanish-language networks like Univision. Grupo Televisa receives royalties from licensing its programs to Univision, and revenue is expected to top $270 million this year. The emergence of Mexico as a manufacturing powerhouse means that the middle class should see a boost as well. Pay TV is popular in Mexico, as seen by a 12% rise in that segment's revenues from last year. Operating margins are improving as well, increasing from 17% in 2011 to 26% as of the most recent quarter.
Grupo Simec (SIM) is a relatively obscure company with a $1.7 billion market cap that makes special bar-quality steel for North American markets. The company has significant downside protection in the form of its cash and cash equivalents of $623 million and total liabilities of just $665 million. Simec is also aggressively buying back stock. On a technical level, the relative strength index is hovering around 31, signaling that the stock may be oversold.
Risks to Consider: Mexico has been plagued by drug violence that will continue to drag on its economy if the government cannot implement new policies to curb trafficking.
Action to Take -->The larger macroeconomic movements stemming from Nieto's reform policies have yet to really take hold in the market, providing investors with an opportunity to buy ahead of the trend.
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