• Thursday, July 12th, 2012

Kenneth Rapoza, Contributor – Covering Brazil, Russia, India & China.

7/10/2012 @ 10:38PM

Last year, Indonesia was the little darling of emerging market investors. This year, it’s Mexico.

When strategists at big Brazilian investment firms like Itau steer their wealth management clients away from their home country and up north, to Mexico, it’s worth noting. Brazil is a big country. It’s got a diverse economy. But it’s no longer Latin America’s favorite growth story. It’s going to grow around 2 percent this year, worse than it did last year. It’s fortunes are tied to China, to some extent, an economy still facing a hardish soft landing and needing monetary stimulus.

Mexico, on the other hand, has the U.S., which is growing faster than Brazil this year. Plus, Mexico is cheaper now than China.

When it comes to portfolio investment, Mexico is the clear winner this year. The iShares MSCI Mexico (EWW) exchange traded fund is up 14.09 percent year to date ending July 10 while the MSCI Emerging markets index is up only 0.7 percent. The iShares FTSE China (FXI) ETF is down 7 percent. iShares MSCI Brazil (EWZ) is down 11.3 percent. And last year’s fave, the Market Vectors Indonesia (IDX) is down 5.6 percent.

The return of the PRI to Mexican politics, Mexico’s pricing powers, and its proximity to the largest market in the world has Nomura Securities saying on Tuesday that over the next decade, Mexico is poised to become Latin America’s largest economy, surpassing Brazil, and become one of the emerging markets’ most dynamic economies.

The PRI party and Enrique Pena Nieto have regained the presidency and the Lower House. Unlike in previous elections, the party supports structural, pro-market, reforms.

In relative terms, the Mexican banking sector remains one of Latin America’s smallest, particularly relative to the level of economic development. So there is a lot of room to grow. Private sector debt to GDP is barely 20 percent versus an average of around 50 percent for Brazil and as high as almost 80 percent in Chile.

Mexico’s economy and its banks are likely to be supported and even accelerated by positive demographics, hitting a sweet spot in 2020. Current projections point not only to Mexico showing one of the strongest levels of population growth among major economies, but also the greatest fall in the dependency ratio (proportion of young/old relative to the working age population). This means a greater relative increase in resources and potentially stronger GDP growth. Some of the benefits of this demographic dividend would not be automatic, but will likely depend on appropriate policy action and reform, members of Nomura’s banking and emerging markets team said in a report on Mexican banks dated July 10.

Audrey Kaplan, a portfolio manager for the $523 million Federated InterContinental (RIMAX) fund, told Forbes recently that Mexico is one of Federated’s favorites.

“The economy has been doing well and that’s got a lot to do with the U.S. Two years ago people said the U.S. would go into a flat growth or no growth environment.  It has not, and that’s been beneficial to Mexico,” she said.  “Plus wage growth in Mexico is flat and it’s rising in China. We’ve had an overweight there since the fall of 2009. A number of our shares in Mexico are up 40 to 70 absolute percent change since we purchased them,” she said, citing America Movil (AMX) as a top buy for Federated.

Brazil probably doesn’t have that much to worry about. The year 2020 is a long way off. A lot can happen in 8 years.

Brazil’s attractiveness as a top destination for foreign-direct investment was taken over by Indonesia last year, however, the United Nations Conference on Trade and Development said last week in an annual report.

Brazil is seen as the world’s No. 5 destination for foreign direct investment (FDI) over the next two years, UNCTAD said. Brazil used to be No. 4.

The top three “prospective host economies” for FDI were unchanged this year from 2011, with China holding the No. 1 spot, followed by the U.S. and India. Indonesia moved up two notches in the rankings to surpass Brazil at the No. 4 spot. UNCTAD’s figures are from a survey, not actual FDI numbers.

FDI to Brazil, which calculates what investors and corporations pump into a foreign economy, stands at around $45 billion, while Mexico FDI is not yet near $30 billion.

Category: BRIC, Mexico
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