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Why Mexico ETF is a Long-term Winner

Neena Mishra


President Obama is visiting Mexico this week and as stated in WSJ article--The Rise of the 'Aztec Tiger'--he will find the country very different from its usual image here. Mexico is currently going through a turnaround under the new president.

We have been positive on the Mexico ETF for quite some time and it remains one of our top choices among the Emerging Markets ETFs, with a Zacks ETF #1 (Strong Buy) rank. It is an excellent long-term investment for reasons stated below. (Read: 3 REIT ETFs you should not ignore)

President Nieto Delivering on His Promises

President Nieto seems committed to shaking up the economy by introducing critical reforms in important areas. Within about four months of assuming office, he has initiated action on reforms in telecom, energy and education sectors and revamping tax codes. He also signed a new law that restricts injections used in the past by vested interests to block regulatory measures.

Further, he has demonstrated that he is not afraid to take on powerful individuals and institutions, in order to tackle corruption. (Read: 3 Red Hot Dividend ETFs)

Economists think that these critical reforms could push growth to about 6%. Both S&P and Fitch have expressed optimism about the reforms and indicated that the country’s credit rating (already investment grade) could be upgraded further. 

Economy on sound footing; Fiscal consolidation on track

As a result of open market policies, fiscal discipline, labor reforms and prudent macroeconomic measures adopted by the country, the economy has been on a sound footing--currently growing at about 4%.

Things look good on the fiscal front as well, with a budget deficit of just 2.5% of GDP compared with 8.6% of GDP for the US, for 2011. Gross debt stands at about 43% of GDP, compared with more than 107% for the US, per IMF.

While credit as a percentage of GDP has doubled in Brazil to about 50% in last ten years and the credit boom seems to be finally coming to an end; in Mexico, it is about 20%, indicating significant room for expansion. (Read: Buy these ETFs to profit from Japan’s massive easing)

The central bank left the benchmark rate unchanged last week, though inflation touched 4.7% earlier this month, as it expects inflation to come down to about 3% later this year.

Thanks to surging foreign investments, foreign exchange reserves touched a new high of $167 billion rcently and the Peso has appreciated more than 5% against the US dollar this year.

New China of manufacturing?

China’s average manufacturing wages, when adjusted for productivity, are above those in Mexico now, according to a study conducted by the Boston Consulting Group (:BCG). BCG forecasts that by 2015, the fully loaded cost of hiring Chinese workers will be 25% higher than the cost of hiring Mexican workers.

Further, Mexico’s proximity to the U.S. means that the companies can ship  goods to the customers much faster and at a much lower cost—as the price of oil has gone up three times since the start of the century. Moreover, the goods coming from Mexico can enter the US duty-free due to NAFTA.

Further, the two leaders are expected to address regulatory and border issues this week, to foster more cross-border trade.

As a result, many US manufacturers are now shifting production to Mexico from China. Last year, Mexico’s manufactured exports were more than the rest of Latin America combined. Based on current trends, it is estimated that by 2018 America will import more from Mexico than from any other country.

Rising Middle Class and Soaring Consumption

As a result of macroeconomic stability, middle class wealth has been rising. Average income has doubled in the past 15 years and the average number of school years Mexicans attend has doubled in the past four decades.

Improving education and skills, and rising participation of women in the workforce has led to improving family incomes.

Rising family incomes and urbanization have resulted in upward mobility and increasing consumption. Going forward, domestic consumption is expected to continue to fuel growth.

iShares MSCI Mexico Capped Investable Market Index Fund (EWW)

Launched in March 1996, the fund now has more than $3.1 billion in AUM. The assets are invested in a basket of 46 holdings; America Movil occupies the top spot with almost 18% asset allocation.

Among sectors, Consumer Staples have the heaviest allocation (29%) while Telecom and Materials round out the top three. Thanks to its heavy exposure to consumer staples and telecom sectors, the fund will benefit from growing consumer demand in the country.

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