Rethinking Mexican Stocks

September 18th, 2015
in contributors

Investing Daily Article of the Week

by Ben Shepherd, Investing Daily

When most of us think of the Pacific Rim, we tend to think of Asia. But that region also includes North America and much of South America, including Mexico. And Mexico has been a major beneficiary of growing trade in the Pacific Rim region.

Follow up:

And if you look past the headlines about drug cartels and violence, you'll find that Mexico has been something of an economic miracle. Since the North American Free Trade Agreement (NAFTA) was ratified by the United States, Canada and Mexico in 1994, Mexican businesses have enjoyed greater access to American markets. That's driven a sizable expansion of the country's manufacturing, particularly in the automotive and aeronautics industry.

The automotive industry has actually become a pillar of the Mexican economy, with auto exports totaling $44.1 billion in the first half of this year. While July was an off month for the industry as output fell by 2%, it was a blip in a long string of record highs. August was no exception with production of 292,271 units setting yet another new record, as exports to the U.S. rose 11% and exports to Europe shot up 53%.

Domestic Mexican sales of automobiles has have been similarly strong, rising 7.9% last month. While that's down from the double-digits rates seen in prior months, since about half of the vehicles sold in Mexico are assembled locally, those sales still made a sizable economic contribution. That's not too shabby for a country we generally think of as being poor.

So what does car production in Mexico have to do with anything?

It's clear evidence that the country's economy is now managed along much more orthodox lines. For instance, the most recent budget put forth by the Mexican government is actually cutting spending to compensate for declining oil revenue, whereas pre-NAFTA spending likely would have actually risen to make up for the slowdown in the energy patch.

As a result of the country's more conventional economic methods, inflation there is running at a five-decade low and the Mexican peso is actually strengthening against the dollar.

So while Mexican stocks are off just like those in the rest of the world, economically speaking the country remains a bright spot in the global economy. And thanks to its close trade ties to the United States, it also presents some interesting investment opportunities.

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