Mexico stocks hit record high

December 11, 2012 


by Pan Kwan Yuk

Need further proof that Mexico is the new “it” Latin American economy at the moment? Consider this: the country’s benchmark IPC index hit a fresh high on Monday as the recent slowdown in Brazil and China continue to drive investors into Mexico.

The IPC index of the leading 35 stocks broke past the 43,000 barrier for the first time to close at 43,134.51. The index is up over 17 per cent this year.

By contrast, Brazil’s Bovespa, which has been having a roller-coaster year, is up 1 per cent for the year to date.

While stock markets elsewhere, from China to Europe to the US, have been choppy amid concerns over growth, the eurozone debt crisis and the looming fiscal cliff, Mexican equities have been on a steady rise this year thanks to its GDP growth (the IMF is expecting 3.8 per cent for 2012) and conservative debt level. Adding to the positive sentiment is Enrique Peña Nieto, the new president, who has promised an ambitious series of reforms. These, he says, could boost growth to 6 per cent.

As Geoffrey Dennis, global emerging markets strategist at Citi, told beyondbrics:

Mexico has several positives: 1) it is tied closely to US economy which is the strongest part of the developed economies; 2) the outlook for structural reform in the new Pena Nieto government; 3) the peso looks undervalued; 4) strong earnings growth; 5) the market has a high proportion of domestic growth stocks which have been defensive this year

Indeed, unlike the Bovespa, which is strongly weighed in commodity stocks, two-third of the IPC is made up of consumer stocks such as telecommunications, retail and consumer goods – sectors that risk-averse investors take refuge in when global growth prospects are uncertain.

And as beyondbrics has noted elsewhere, Mexico also has geography on its side. After lagging behind China in manufacturing exports for a decade, Mexico is catching up fast, thanks to rising labour costs in China and higher transport costs.

From Reuters:

Mexico’s export growth caught up with China’s in 2010, when the country also began to win back some of the U.S. market. It now has a record 12.9 percent share of goods imported by the United States, just short of China.

Finance ministry officials point to a narrowing wage gap in manufacturing as Chinese labor becomes more costly. In 2007, hourly Mexican manufacturing wages were 238 percent higher than in China, but are now just 7 percent higher.

As well as proximity to the United States, Mexico also enjoys strong patent protection. Barclays Capital also says that specialization in high-value sectors such as autos and telecommunications equipment has helped manufacturers gain an edge over China.

Mexico has a particular advantage in bulky goods, which can take four to five weeks to ship from China. The country is the world’s biggest exporter of flat screen TVs, the second biggest exporter of two-door refrigerators and freezers and the fourth biggest exporter of cars, according to government data, while the aerospace industry is also growing rapidly.

All this could be rendered meaningless if the US economy was to take a turn for the worst. Analysts reckon Mexico’s GDP growth could hit 4 per cent this year as long as the US economy can maintain growth of at least 2 per cent. But for now at least, that seems feasible.

And that appears to be enough for investors, who have driven valuations are up across the board. According to Dennis, the MSCI Mexico index is now trading at a “slightly rich” ratio of around 16 times forward earnings, while the local Bolsa is on 14.5 times.

Still, Citi thinks the rally still has some way to go. It expects the IPC to hit 51,000 by the end of 2013.