Why Mexico Is Becoming The New China

June 25, 2014

The trade relationship between the U.S. and Mexico was significantly strengthened through the North American Free Trade Agreement (NAFTA), signed in 1994. And since then, Mexico has worked on building trade agreements globally and now holds agreements with four dozen countries that allow duty-free trade.

Mexico’s share of North American production has tripled to about 20 percent since 1994. Since the 2008 recession, there has been a further shift in North American production to Mexico from both Canada and the U.S. Canada’s share flattened at around 17 percent in the early days of NAFTA but had fallen to 14 percent by last year.

Mexico’s domestic market has rebounded from a long slump, as growth in Mexico’s gross domestic product (GDP) advanced a seasonally adjusted 0.28 percent in the first three months of 2014. Year-on-year, GDP grew 1.8 percent in the first quarter. And a sign of Mexico’s growing global role is that auto exports outside of North America will rise faster than those to the United States.

For the growing share that is being enjoyed by Mexico, low labor costs, proximity to Latin American markets and government incentives have each helped spur the shift. By 2020, Mexico will have the capacity to build one in every four vehicles in North America, up from one in six in 2012, according to HIS, a global information company.

China_Vs_Mexico_Shipping_Cost

Source: TACNA Services Inc. Mexico

ETFs To Play The Shift To Mexico

So let’s return to ETFs such as EWW, a fund with almost $3 billion in assets under management. It tracks the MSCI Mexico Investable Market Index, which consists of stocks traded primarily on Mexico’s Stock Exchange.

Launched in March 1996, the fund has trading volume of more than 5 million shares a day. The assets are invested in a basket of 59 holdings; and Carlos Slim’s America Movil occupies the top spot with an almost 13.6 percent asset allocation.

Performance in the past three months has been strong, with EWW up 12.5 percent, 2.1 percent of it in the past month. Since inception, it has posted annualized gains of almost 13 percent for a total return of 787 percent, or upward of nine times more than when it launched.

The index is a capitalization-weighted index that aims to capture 99 percent of the total value of Mexico’s stock market.

Among sectors, consumer staples have the heaviest allocation (22 percent), while financials and basic materials round out the top three. Thanks to its heavy exposure to consumer staples, the fund will benefit from growing consumer demand in the country.

Additional ETFs that we watch and that invest 100 percent of their funds in Mexico companies:

 

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