Foreign investment in Mexico rises to new highs despite sluggish growth, the Mexico Fund is still betting on infrastructure, financials, and the consumer.
The USMCA Is Important For The Economy
The USMCA, the freshly renegotiated NAFTA, is yet to be ratified by the U.S. Congress. Despite Democratic stonewalling many on Wall Street and in Industry see the deal as an important move for the U.S. Jamie Dimon, CEO of JP Morgan Chase and member of the Presidents Business Round Table, is one such business leader. He sees the USMCA as important for the economy and not just for the USA, for all of North America. According to him, the group is doing all it can to get the deal done.
Lead Economic Adviser to the President, Larry Kudlow, says the USMCA is more important to the U.S. economy than a deal with China. The deal would free up supply chains throughout North America, greatly reduce the need for trade with China, and boost economic growth in all three nations (Canada, the U.S., and Mexico).
All the uncertainty, as well as domestic turmoil, has had an effect on Mexico’s economic activity but growth is still in the forecast. The first quarter of 2019 saw GDP contract by -0.2%, the first contraction in two years, but that weakness was attributed to storms, strikes and their effects have already dissipated. The Conference Board’s Index of Leading Indicators has been positive most of the year. Ironically, the current read of the Index of Leading Indicators is a lagging read of May data but it does point to expansion in the current time frame.
Up 0.9% this month it has been positive three of four months this year and averaging 0.75% per month. The index points to steady if not robust gains in GDP later this year that is echoed by the Coincident Indicators. The Coincident Indicators have been positive if less robust and point to sustained growth within the Mexican Economy. Admittedly, the 2.5% target set by the government will be hard to reach but the IMF’s 1.6% forecast is equally unlikely. The more likely scenario is that Mexico’s economy will continue to expand at a tepid 2.0% for the foreseeable future.
Longer-term, the growth outlook is brighter. Mexico has four times the population of Canada with only 2/3’s the GDP so there is room and fuel for expansion. At present about 40% of Mexico’s population is living in poverty so the biggest hurdle is getting people working. Based on the inflows of money from foreign investors people are trying to do just that, get people working. Foreign investment rose 7.0% YOY in the first quarter of the year bringing the total to a new high.
The Mexico Fund, a benchmark for active investment in Mexico, continues to invest heavily in infrastructure, financials, and the consumer. The top holding is America Movil. America Movil is South America’s largest cell phone provider, the managers at the Mexico Fund have increased its allocation to 12% of the portfolio. The next two largest holdings, at about 10% each, are Mexico’s largest consumer bank and Fomento De Mexico, the largest bottler of Coke outside the U.S. The Mexico Fund is a closed-end fund trading on the NYSE under the ticker MXF. It invests exclusively in the equities of Mexican businesses and pays a dividend yielding close to 6.0% at today’s prices.
Mexico is not the fastest growing emerging market or the largest but it is an attractive one for investment. Although growth is expected to be sluggish in the near-term government reforms and cooperation with the U.S. bode well for future economic activity. Investors seeking exposure to this budding economy may find the Mexico Fund and its dividend a good fit in their portfolios.