sexta-feira, 26 de fevereiro de 2010

The Global Guru: Latin America's Mexico: The Next BRIC Economy?

The Global Guru: Latin America's Mexico: The Next BRIC Economy?

For all the attention global investors have lavished on Brazil in recent years, in the minds of average investors, Latin America still has an image problem. While Asia evokes images of gleaming skyscrapers, high-tech exports, and boatloads of bright, future PhDs populating the campuses of the top U.S. universities, when you hear the words "Latin America," you may still think of high inflation, drug trafficking, and urban slums. But the region may produce the next country to join the vaunted, high-growth BRIC nations of Brazil, Russia, India and China. 

The irony is that gleaming Asian skyscrapers don't necessarily translate into stellar investment returns. Compare the returns on two broad-based indices of Latin America and Asia (excluding economic problem child Japan). The surprising reality is that you would have made a lot more money in Latin America over the past five years than by investing in the high-growth companies of Asia. 

Chart for iShares S&P Latin America 40 Index (ILF)

Understanding that you don't necessarily generate the best returns by investing in countries with the highest growth rates and most impressive skylines is one of the most counterintuitive yet important insights to maximizing your returns in global investments.

Over the coming weeks, I will be devoting an issue of The Global Guru to each of the Latin American economies (other than Brazil, which I have covered elsewhere), in which you can invest through exchange-traded funds (ETFs) or American Depository Receipts(ADRs) listed on U.S. exchanges: Mexico, Chile, Peru, Argentina, and Colombia. 

Mexico: The Almost BRIC 

Mexico still feels slighted that, back in 2001, Goldman Sachs economist Jim O'Neill anointed politically corrupt, emerging-market "bad boy" Russia, and not Mexico, as the fourth member in Jim O'Neill's now famous BRIC acronym. After all, Mexico's economy is only slightly smaller than Russia's. And like Russia, it has produced its share of billionaires, most notably Carlos Slim, whose holdings in telecom giant America Movil (AMX) briefly made him richer than Bill Gates or Warren Buffett. 

While Washington, D.C., is obsessed with what is happening 7,000 miles away in Beijing, the future of Mexico may have a bigger impact on the future of the United States than China ever will. Jim Rogers has even predicted the eventual dissolution of the United States in favor of a new, Spanish-speaking country that eventually will engulf California and much of the Southwest United States. Yet, it is precisely this familiarity with Mexico that causes U.S. investors to underestimate the investment potential of the economy just south of the border. 

Mexico: Development in Fits and Starts 

It was the election of former President Vicente Fox in 2000 that transformed Mexico from economic basket case to potential BRIC rival. Fox presided over five years of unprecedented macroeconomic stability in Mexico, during which poverty in Mexico dropped precipitously and inflation fell into low single digits. At the same time, the government's anti-drug campaign faltered. Mexico's justice system -- the police, the courts, the jails -- remained a disaster. And Fox made no progress in breaking up public and private monopolies, or in enhancing the labor market's flexibility that could kick-start economic growth to reach BRIC levels. 

And then there is the issue of Mexico's dependence on oil. As recently as 2006, Mexico was the fifth-largest oil producer in the world, accounting for 15% of its exports and 9% of its GDP. Since then, its global ranking has plummeted to #10, as the income brought in by oil collapsed and may even threaten the country's credit rating. 

Mexico: In Uncle Sam's Long Shadow

It used to be that when the United States sneezed, the rest of the world caught a cold. But with the U.S. accounting for more than 80% of Mexico's exports, a U.S. sneeze has always been more akin to giving Mexico pneumonia. NAFTA in 1994 brought free trade, modernization, new technology and rapid growth to Mexico's economy; however, the trade agreement left Mexico dependent on the American economy. The maquiladoraborder industry turned Mexico into an export powerhouse which, at the peak in 2000, had a $20-billion trade surplus with the United States. 

But by 2003, China had emerged as a major competitor. While a Mexican worker would work for $2 an hour, a Chinese worker will toil for 22 cents. Although they were next door to the United States, Mexican factories simply could not compete. Forced to restructure, the maquiladora recovered riding the coattails of U.S. economic strength. But the overnight emergence of a competitor from halfway around the world made Mexico realize that it was now playing in a global game. While the United States still remains by far Mexico's most important trade partner, Mexico steadily increased its exports to other nations as its trade with Costa Rica, Chile, Honduras and the European Union has grown rapidly. 

The "Great Recession" of 2008 and 2009 revealed the structural weaknesses in Mexico's economy. It contracted at the fastest pace in more than 25 years last quarter, as the global recession and swine flu caused a plunge in industrial output and services. The lagging U.S. economy took its toll on Mexican migrant workers, who sent home 16% less money in 2009 than in previous years. 

Mexico: Making Money South of the Border 

If negative headlines, stories of violent drug busts, and the onslaught of illegal immigration make you hesitant about investing in Mexico, think again. Had you invested $10,000 in the iShares MSCI Mexico Investable Mkt Idx (EWW) on March 1, 2000, you'd be sitting on $33,189 -- a 232% gain. Invest that same amount into the S&P 500 and you'd have $9,466. Investing in Mexico over the past 10 years would have put you far ahead of even Warren Buffett. for iShares MSCI Mexico Investable Mkt Idx (EWW)

The lesson? Sometimes the biggest global investment opportunities are right at your doorstep. Don't let over familiarity impede your investment profits. 

Nicholas A. Vardy 
Editor, The Global Guru 

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