Why Mexico's Become a Hotter Investment Than Brazil

Published: Thursday, 4 Apr 2013 | 4:19 PM ET

By: Anna Andrianova

Special to CNBC.com

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Mexico, overshadowed by Brazil for years, has secured its place as the new favorite among investors looking to put cash into Latin America.

"A lot of funds are looking into Latin America as sort of a portfolio of opportunities. Brazil became a lot less attractive in the last year and a half," said in an interview Clinton Carter, director of research at Frontier Strategy Group. "Mexico has definitely come up as a priority."

In the past 12 months, iShares MSCI Mexico Capped exchange-traded fund rose more than 17 percent, when a fund trailing Brazil—iShares MSCI Brazil Capped Index Fund—lost over 15 percent.

"The mood in Mexico is clearly constructive. A lot of faith is being put in the ongoing reform process under President Pena Nieto, including deregulation of key industries," wrote Jens Nordvig, global head of currency strategy at Nomura Securities in a recent note.

Investors have been encouraged by signs that the new Mexican president will continue to push for economic change. Its congress has already approved labor and education reforms and a long-awaited telecommunication bill came through in March to bring competition into a highly concentrated industry. 

Other key reforms—fiscal, financial and energy—are expected to come through this year as well, Nordvig says.

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"We like Brazil," said Jeff Shen, BlackRock, discussing where he sees the best global plays this year.

"This is an almost unprecedented, comprehensive reform process, which over time will likely deliver higher growth capacity for Mexico," Nordvig said. He expects the Mexican economy to expand 4.5 percent this year.

The shake-up of the energy sector will be a great boost for the economy, and Frontier Strategy Group says a partial IPO could be in the cards. Revenues of the state-run petroleum company Pemex have been flowing into state coffers, resulting in underinvestment and a decline in output.

Frontier says the energy sector will most likely retain its nationalistic hue but provide private sector opportunities in the costly and risky exploration of offshore and shale gas reserves.

While Brazil is still attractive longer term, investors are also finding that Mexican companies have a better profit profile. The companies tend to higher profitability and better margins than those in Brazil.

"Mexico, on most industries—and we've done a fair amount of surveys on this—generally has higher margins and is more profitable than a lot of other emerging markets," said Carter of Frontier Strategy Group.

Brazil, the largest economy in Latin America, has been battling high inflation and investors are worried about the nation being stuck in a low-growth environment. Last year, the country grew less than 1 percent while inflation climbed to nearly 6 percent.

Brazil's currency market bears another concern. From a long-term perspective, investors are looking for a significant correction and weakening of the Brazilian real, said Nordvig. There is an uncertainty about the policy-making decisions and target rates, as "monetary policy makers are in a data-watching mode."

"The mood in Sao Paulo specifically is decidedly bearish on the Brazilian economy," wrote Nordvig, who traveled to both Brazil and Mexico in March. "The mood shift constitutes a dramatic change compared to 2010-2011, when it seemed that 5 percent growth was the new norm."