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Pena Nieto: Mexico’s Teddy Roosevelt (EWW, SIM)

April 29th, 2013

mexicoThere is a lot of good stuff happening in U.S.-Mexican business relations.

  • Each day, $1.4 billion worth of two-way trade and roughly 1 million legal border crossings.

  • About 1 million American citizens live in Mexico and approximately 10 million Americans visit Mexico every year.
  • More than 15,000 American companies have operations in Mexico, and U.S. companies have invested $145 billion in Mexico since 2000.
  • Mexico is the United States’ second-largest export market (after Canada) and third-largest trading partner.
  • 80% of Mexico’s exports in 2011 went to the United States, and Mexico is the second-largest supplier of oil to the United States.

Meanwhile, the headlines highlight nothing but border drug violence, the heated immigration debate, and how Brazil is the leader of Latin America.

Why is this important to you as an investor? Because you can make a lot of money when reality is so different from perception.

Robust manufacturing has fueled Mexico’s surge. China’s rising labor costs and the higher logistical expenses of moving goods across the Pacific are transforming Mexico into a premier global manufacturing platform.

Mexico is now the world’s top producer of flat-panel televisions and had $300 billion of manufactured exports in 2012. And investors poured capital into Mexican stocks and bonds last year – five times the amount they invested in Brazil.

And now the agenda of Mexico’s new president Pena Nieto is feeding more and more talk about Mexico replacing rival Brazil as the Latin American darling of international investors.

The election last July of Mr. Nieto could be a watershed event. He has shown steely willingness to take on powerful vested interests from labor union bosses on the left to monopoly tycoons on the right. The goal is a more open, competitive Mexican economy leading to higher economic growth.

His main targets are energy and telecommunications, tax reform and the country’s bloated education bureaucracy. He has already pushed through constitutional reforms that take power from teacher unions.

A former state governor, the 46-year old Nieto has taken a smart, savvy and aggressive approach. In style and substance, it reminds me of Teddy Roosevelt’s use of the bully pulpit to advance his trust-busting and progressive politics.

He needs to take dead aim at the state oil company Pemex, which provides one-third of federal revenue despite suffering from a 24% fall in production since 2004. Nationalized in 1938, Pemex is a model of inefficiency with 160,000 employees.

Mr. Nieto has the political skills to get things done and has come out of the gate strong.

The question is, does he share Teddy Roosevelt relish for a long good fight?

Now, I should admit there are some investment gurus who think all politics is bunk. Their advice is to ignore politics, both domestic and international, as mere background noise.

But let me ask you if Ronald Reagan’s election and policies had nothing to do with the great bull market of the 1980s. Or if Margaret Thatcher’s rise to power and her fierce support of free market economics had no impact on the resurgence of Britain’s economy and markets. And if the return of Mr. Abe to power in Japan late last year has nothing to do with the 40% surge in Japan’s stock market.

The easiest way to play it is the iShares MSCI Mexico Inv. Mt. Idx. (ETF) (NYSEARCA:EWW), but you can do much better drilling down to a specific stock pick.

For instance, my top Mexico pick has been Grupo Simec S.A.B. de C.V. (ADR) (NYSEMKT:SIM), a manufacturer of specialty steel used to frame new plants. SIM is up 48% over the past year, and at 1.2 times book value the company is still fairly cheap.

Stay tuned in the weeks ahead as we identify more Mexican companies on the rise.

Good Investing,

by Carl Delfeld, Investment U Senior Analyst


NYSE:EWW


 

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