I have fond memories traveling around northern Mexico during the 1950?s. My grandfather used to drive us across the border into Baja in his pickup truck, the back loaded with camping equipment, water, fishing poles, rifles, and shotguns. There was no border control.
To eat, we only had to wait for the tide to go out on the Sea of Cortez, uncovering a banquet of fresh mussels, oysters, and abalone. Eventually, my Spanish got pretty good, especially when it came to fixing cars. When we encountered rare collections of palm frond huts we would lounge around on the beach eating all the tacos we wanted for 5 cents each.
There wasn?t a hotel on the entire peninsula; and the desert was frequented with armed banditos. If any stranger approached, we fired a shot over their heads, at a considerable distance, to convince them to seek easier pickings elsewhere. It was still the Wild West down there, and we didn?t go there to socialize.
As much I loved the land of Montezuma and Pancho Villa, I have never invested a penny in the country. Oil has been the bread and butter for the land south of the border for nearly a century, accounting for the largest share of the government?s revenues. But its main Cantarell field is nearly tapped out, suffering from declining production for years.
There was a decade long drug war in which 40,000 died. It seemed, for a while, that the narcoterrorists would win. Mexico City became the kidnapping capital of the world. In the emerging market space, there always seemed to be better opportunities elsewhere. On top of that, the country has a long history of expropriating the property of gringos. So for decades I limited my interest in Mexico to beer, tequila, and tacos.
However, in recent months, the jungle telegraph in the hedge fund community has been buzzing about this once unloved country. I thought I?d take a closer look. It turns out that a few things have changed over the last 60 years.
First, oil. Yes, Cantarell is just about done. But much of Mexico?s subterranean geology is similar to that of the US. That means that the fracking boom, whereby untold quantities of cheap natural gas have suddenly become available, is spilling over into Mexico as well.
And guess what? They don?t face the environmental backlash or the permitting restrictions that American drillers must endure. As a result, Mexican energy production is taking off once again, with exports to Asia a major target. Energy infrastructure investment will become a significant economic driver in the decades to come. This is hugely positive for both the Mexican economy and the peso.
When China first burst on the international scene during the early nineties, using its cheap labor to replace much of he world?s manufacturing capacity, it was Mexico that took the big hit. Much of their low-end production, such as in textiles, decamped for the Middle Kingdom, leaving hundreds of thousands jobless.
The new ?onshoring? trend that is creating a blue collar jobs renaissance in the US is gaining speed in Mexico too. While Chinese wages have been skyrocketing at a 20% annual rate, they have been relatively stable in Mexico.
You see this first and foremost with goods that pose logistical challenges, such as anything involving significant transportation costs. You probably don?t know this, but that big screen high definition TV dominating your living room, which used to be assembled near Shenzhen, is now put together a couple of miles inside the border with Texas. From there, they can be easily and cheaply shipped by rail or truck to any point in the US.
Mexico?s $1.18 trillion GDP ranked 14th in the world in 2012. It stood 11th in population with 112 million. Its per capita income of $10,247 comes in at 66th. The energy boom is likely to boost economic growth from the current 4% annual rate. A strong peso should cause its inflation rate to fall from the present 3.6%. I don?t have to tell you that this is a dream come true scenario for investors. Many analysts expect Mexico to join the world?s top ten economies by 2020.
The one problem Mexico has is that it is tarred with the emerging market brush (EEM), one of the world?s poorest performing asset classes this year. At least Mexico has flat lined instead of crashed, as others have. You may have to wait for the Chinese tide to lift all boats for this unloved sector to move back into the spotlight. That said, emerging markets could be the great rotation play in the last quarter of 2013.
There are a number of American Depository Receipts (ADR?s) issued by Mexican multinationals listed on the NYSE, such as those for Grupo Financiero Santander (BSMX), one of the country?s largest banks. If you are really brave, you can open a peso denominated account with a broker in Mexico City and invest in stocks there directly. The easiest way to put money into the country is through the Mexico iShares ETF (EWW). Or you can trade the leveraged long ETF, the ProShares Ultra MSCI Mexico Investable Market ETF (UMX).
I went down to Cabo San Lucas a few years ago for some Marlin fishing and to see what had changed. A ten-mile string of hotels lined the beach with names like the Trump Tower and the Four Seasons. The price of tacos had risen from 5 cents to $2. Free spending European tourists crowded bars like the Cabo Wabo, where they strung you up by your feet to see if you could drink tequila shots upside down.
Rather than dine at one of the many overpriced and crowded restaurants, I got in the car and drove north. I stopped at a small out of the way cove, and as the tide went out, I ate my fill of shellfish. Grandpa would have been proud.