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The US/Mexico Border Will Be Shut Down

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Trump’s latest Tweet suggests he’ll shut the US/Mexico down if he doesn’t get his way on border control but it’s an empty threat.

US Government Shutdown Impasse Rages On

The US government shutdown impasse rages on as Democrats and President Trump refuse to meet in the middle on immigration reform. The latest news is a Tweet from the President to the effect he will shut down the US/Mexico border if he has to in order to get his way. The threat is dire but an empty one as shutting down the border is a more complex task than simply closing the gates.

The threat of a border shut-down, however unlikely, comes at a critical time in US/Mexican relations. The two countries have just reached an agreement on trade that is waiting for ratification and positive relations are key to that process.

On the flipside, there is other news relating to US/Mexican relations that is garnering far less attention. The US has pledged nearly $11 billion in aid to Central America and Southern Mexico. The news, issued by newly elected Mexican President Andres Manual Lopez Obrador, is a step in the right direction regarding border control and immigration and what many in the US (this writer among them) would like to see more of.

The pledge is to help strengthen economic development in the Central American and southern regions of Mexico. Economic development will accomplish many things that will benefit local, regional, and international communities including improving the live of impoverished people and stemming the flood of illegal immigration that is plaguing Mexico as well as the US. In his address President Obrador said he has a dream, a dream in which nobody wants to go to the US for work because economic opportunity (and living conditions) in Mexico are just as good.

Economic Opportunity, Heche en Mèxico

Believe it or not, there is massive economic opportunity in Mexico and it is only begun to produce returns for investors. Reforms begun under former-President Nieto helped turn Mexico into a manufacturing and exporting powerhouse set to rival China in the not too-distant future.

Among those reforms was a push to move the Mexican government away from dependence on oil for revenue and open up Mexico’s vast energy reserves to private investment dollars. Those reforms are being continued by the newly elected government which plans on increasing oil production by 50% over the next 6 years. Part of the plan includes awarding 20 new drilling contracts for the development of oil fields in the Gulf of Mexico and onshore.

In terms of GDP and output Mexico has been growing steadily for over ten years and set to continue growing in the coming years. This year, 2018, saw GDP bottom out near 2.3% annualized which is a small concern compared with the expectation for growth. Looking forward, Mexican GDP growth is expected to accelerate over the next four years at least before topping out above 3.0%. With the US, Mexico, and Canada set to ratify the USMCA and Mexico working toward improving trade relations with other partners (China and the EU) I think those estimates are low.

How To Invest In Mexico

The three leading sectors of investment in Mexico are the consumer, infrastructure, and the financials. The consumer is benefiting from business reforms that have increase employment and wages. Infrastructure is benefiting from a rapidly urbanizing and modernizing population with growing levels of disposable income. The financial sector is benefiting from activity in business and the consumer that is driving loan growth, deposit balances, and fee income.

There are multiple ways to invest in Mexico including ADRs on leading companies like Walmart de Mexico, Fomento Economico de Mexico, Cemex, and Grupo Banorte. What many find easier and a better to fit to the portfolio is a Mexico-focused ETF like FLMX or EWW. The problem with the ETFs is that dividends are often much lower than what the underlying companies are paying, and much much lower than what you can get with an actively managed fund like the Mexico Fund.

The Mexico Fund (MXF) is a non-diversified closed-end fund focused exclusively on Mexican equities. It pays a dividend based on an MDP which states distribution is tied to NAV. The funds NAV, over the past year, saw an increase greater than 12% which led to a 66% increase in payout for the coming year. At present levels the MXF is yielding near 8.0% annually, paid out quarterly.

As a CEF the Mexico Fund has a tendency to trade below its NAV and that can be a value-trap for the uninitiated. The discount has recently widened to a historically high 15% (driven by the global equities sell-off) which is offering an additional value for new investors. With the discount so low and outlook for Mexico so bright investors can expect to see NAV and share prices move higher, and the discount to NAV narrow, over the long-term.