It is without a doubt that Mexico’s economy is steadily growing. Economic activity has been bolstered, supported, and stimulated by reforms enacted by previous President Enrique Nieto and now let to run by newly elected President Obrador. While Mexico’s economy has been stabilizing big business and investment money has been quietly moving into the country and yet no one seems to be talking about.
The near-term estimates vary from source to source but projections for Mexican GDP growth from the World Bank, IMF, United Nations, and EU tend to agree with the OECD longer-term. Mexico’s economy will continue to stabilize in the near term, averaging better than 2.75% growth over the next four decades. Activity is expected to peak out near 3.70% sometime in the 2040’s but remain positive and above 2.5% until 2060.
What does this mean for investors? Lots of opportunities and that is why big business and private-equity firms like Blackstone are moving into the region. One of the reforms enacted by Nieto was a relaxation of barriers to investment. Specifically, his reforms have allowed Mexican pensions funds, known as Afores, more flexibility in what and where they can invest. Those reforms have attracted more than six major private equity firms to the sector and they’ve raised collectively several billions of investment dollars.
Mexico’s pension fund sector is the largest and one of the fastest growing in Latin America. Funds like Blackstone, Blackrock, and KKR are going to use their access to this market to create new investment funds targeting infrastructure, energy, real assets, growth equity, and spsecial situation hedge funds and will be listed on the Mexican stock exchange.
Currently, Mexican pension funds are restricted in what they can invest in. Even with last years reforms the funds are still limited to investing no more than 20% of their money in non-Mexican assets and 20% in private equity. President Obrador has proposed a bill to further loosen the restrictions and it will be voted on soon by the lower House of the legislature.
And private-equity is not the only big business interested in Mexico. Amazon just revealed it was in talks with Mexico’s Central Bank to help launch a mobile-payments platform. The platform would allow users to pay with a QR code from a phone and alleviate need for cash. Users will be able to make payments without incurring a charge, the push to install the system is intended to spur use of Mexico’s CoDi banking system.
It is estimated that less than half of Mexican’s have a bank account but nearly all have a cell phone. Increasing the number of bank accounts and the ease with which they can be used will boost the financial system and the e-commerce/retail sector, a win-win for Mexico, Amazon and investors.
CannAmerica, a U.S. based cannabis/CBD business, just announced a joint venture to build a production and storage facility in Mexico. The company has a binding agreement with SERICEA Labs and CBDistribution Company to build and operate the facility. The facility would be a central point for importing and storing CBD and refining CBD oils and products.
The Bottom Line
The bottom line is simple. Mexico has a burgeoning economy but one that is still young and underdeveloped. There are risks for sure, corruption in the government is only one aspect for investors to be wary of, but the potential for reward far outweighs the dangers. With the fastest developing economy in Latin America, and one becoming an important cog in the global import/export cycle, investors are well advised to consider adding exposure to their portfolios.
There are numerous Mexico-focused ETFs to choose from and none of them are bad,when you compare them to each other. They are all pegged to the MSCI Mexico Index, all invest in Mexico’s largest and most stable companies, all have the same stocks with the same weighting and all yield about 2.35% at today’s prices. If you compare them to a closed-end fund like the Mexico Fund, Inc (MXF) things start to look a little different.
The Mexico Fund also targets Mexico’s largest companies and it tends to have large positions in the same stocks as the ETF but that is where the similarities end. The Mexico Fund has two advantages over the ETFs that make it more attractive for income and retirement accounts. The first is active management. The funds managers target the fastest growing sectors in Mexico which right now, coincidentally, include Telecom, Financials, and Consumer Products, all sectors that will benefit from increased outside investment and the CoDi payment system.
The second, and to me, the more important is that the Mexico Fund pays a much more substantial dividend. The MXF pays a quarterly dividend according to a managed distribution plan that comes out to about 5.70% at today’s prices. One reason for this is the discount to NAV, net asset value. As a closed-end fund the MXF tends to trade below its fair market value, a so-called value trap, but an opportunity for savvy investors.
You never want to invest with the expectation the discount will disappear but you can use it to your advantage. Lately, the discount has been widening as Mexican equities move higher, a sign the MXF is undervalued by today’s market.