Mexico is enjoying something of a renaissance, benefiting from both the recovery of the US economy and the series of political reforms introduced by the new president Enrique Pena Nieto, which are improving the investment environment and aimed at tackling some of the drug-related violence that has plagued the country.
Mexico is also gaining ground previously lost to China in terms of the cost of labour. While Chinese wage costs have been subject to inflation, there has been little growth in labour costs in Mexico, putting the two countries back in equilibrium.
Add this to Mexico’s proximity to the US, which shortens the supply chain, and it becomes clear that Mexico can offer an advantage over its Asian competitor.
US and Mexico hand in hand
The peso is one of the only currencies to have appreciated versus the dollar lately, increasing by 5% in the past three months, and by 6.5% over six months.
Mark Livingston, investment director, emerging market equities at Fidelity, said: “The US and Mexican economies are strongly correlated, and as a large producer of car parts for the US, Mexico has benefited from the strength of auto sales in the US since 2007. Correlation between the US and Mexican economies is so strong that it is estimated that when the US economy grows 1%, Mexican GDP will increase 1.2%.”
Manufacturing industry aside, there are opportunities in the oil sector, an area which is currently under-exploited especially in comparison to US efforts across the border in the Gulf of Mexico.
Livingston said: “Mexico is producing less than three million barrels of oil a day, and in terms of numbers, US-run rigs in the Gulf of Mexico outnumber those run by Mexico 100 to one, so there really is huge potential in this arena.”
The drawbacks
Barriers to entry do of course remain, relating in large part to violence and perceived corruption.
Julian Thompson, manager of the AXA Framlington Emerging Markets Fund, said: “Violence did take a turn for the worse under the last president, which was perpetuated by the aggressive war on gangs he launched. However, unlike in other economies, it hasn’t had an impact on the investments.
“There is also a perception that investments in Mexico are expensive, but the reality is that Mexican companies are high quality, and the currency is appreciating, so they are very worthwhile investments.”
Fidelity announced the launch of a new emerging markets debt fund this morning.
