Mexico's New President Offers Much to U.S. Investors

By Michael B. Lewis
November 30, 2012
fool.com

For a few years now, Mexico has become an increasingly attractive location for both U.S. companies and foreign investors. The country boasts a strong economy, including very little inflation and debt. In July of this year, Mexico elected a new president -- Enrique Peña Nieto. Peña Nieto's biggest goals are to curtail the rampant drug-related violence that has left 65 ,000 dead in the last six years, and boost the already strong economy, all while increasing ties with the United States. What impact will Peña Nieto have on Mexico, its public companies, and your stocks?

Party rebirth

President-elect Peña Nieto comes from the Institutional Revolutionary Party, or PRI. This is a political group to the left of President Felipe Calderón, a conservative leader who spearheaded the country's major effort to capture or kill drug cartel leaders, which, at the same time, greatly increased drug-related violence in the country. The result was a tarnished international image that gave people an idea of a crime-ridden, dangerous Mexico.

Peña Nieto, on the other hand, is not interested in hunting down the cartel leaders as the method to decrease drug production and trafficking, but to first and foremost decrease violence. Following this, the focus shifts to strengthening Mexico's economy in the international arena, and attract greater direct foreign investment. Much of this has to do with Mexico's relationship with the United States, its largest trading partner.

Strong ties

In an opinion piece by Nieto in The Washington Post last week, the leader highlighted the immense trade that takes place between the two nations. He cited that the North American Free Trade Agreement links 441 million people "producing trillions of dollars in goods and services, making it the largest trading bloc in the world." The effort couldn't come at a better time.

Mexico's economy is projected to grow 4% this year, above the global average. And, as China's growth slows, and the outsourcing of jobs to the region becomes less attractive, Mexico is emerging as a new leading destination for manufacturing. Plenty of U.S. and international companies already have manufacturing facilities in the country, including Coca Cola (NYSE: KO ) , General Motors (NYSE: GM) , and Audi AG (AUDVF.PK). These companies are able to produce more cheaply than in their own countries and, for the U.S.-based companies, expenses have a built-in discount with the geographic proximity. Peña Nieto fully supports foreign manufacturing interest, which helps build infrastructure and generates thousands of jobs inside Mexico.

Energy production is also a big focus for the incoming president. Mexico's energy business is somewhat of a national pride, and the country holds the fifth largest shale gas reserve on the planet, but current laws prevent much direct foreign investment in the sector. In 2011, foreign investment in Mexico totaled $20 billion. Economists believe this number could double if efforts are successful in encouraging additional foreign capital.

Under this new leadership, things are expected to change as the laws are repealed, opening the doors to greater investment, and contributing to the future of an energy independent North America.

International plays

For big Mexican public companies, such as Cemex (NYSE: CX ) , I believe the future looks bright. Cemex is the largest producer of concrete in the world, but has suffered from falling sales over the past few years. The company should benefit from the increased ties with the United States, though, as the housing market here, as well as in Mexico, continues to improve, and spurs the need for raw materials. Cemex, though near a 52-week high, still trades at a price-to-book value of just 0.87. For an asset-heavy company like this one, a price-to-book under one suggests that the market believes those assets will deteriorate in value, or that the company is looking at negative returns over time. With the current trends, and the new president in place, I find this an unlikely outcome and, instead, consider Cemex a tempting investment for an emerging market, value-oriented investor.

Would you rather have the backing of a major, bulletproof U.S. company? How about Coca-Cola's second largest bottler in Latin America, Arca Continental (EMBVF.PK)? Arca had a strong third quarter with EBITDA up 17.1%. The year, as a whole, has been very kind to Arca, which has flourished in top- and bottom-line sales, not to mention a near 60% increase in stock price, year to date.

Safe emerging market investing

Two problems that many U.S. investors have with investing abroad is understanding foreign business models, and having enough knowledge of foreign economies. With Mexico, this is much alleviated, given the strong similarities between the U.S. and Mexico, in addition to the close trading ties and economic relationship.

Investors would be wise to turn their attention to Mexico as this new president assumes office. If Enrique Peña Nieto and his PRI party are successful in their goals, we can expect a more open, more prosperous Mexico that will benefit not only its people, but affiliated foreign parties, as well.