Investing in Mexico May Be a 100-Year Opportunity

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A hundred years ago Mexico was a very different place.

Believe it or not, Mexico was once a free-market beacon of rapid economic growth. It had low taxes, encouraged foreign investment and had reformed its laws to become more business-friendly.

And under Porfirio Diaz, Mexico pursued a pro-U.S. policy, invested heavily in education and rejoiced when local and foreign magnates opened new job opportunities for the Mexican people.

Then it was all undone. Diaz was tossed out by a revolution in 1911.

Since then the news from Mexico hasn't been so good.

After more than a decade of unrest, the Institutional Revolution Party (PRI) took over in 1929 and ruled the country with a kind of klepto-socialism for the next 71 years.

In the aftermath, the oil business was later nationalized, and run thereafter as a state-owned monopoly called Pemex with no foreign investment allowed. The education system became dominated by the teachers' unions, a central force of the PRI.

And in 1988, the telecom company was privatized to Carlos Slim, who gave Mexico a monopoly service with some of the world's highest telecom rates, thereby making himself the world's richest man.

In 2000, the PRI did manage to finally lose power. But the PAN governments of 2000-2012 never had a majority in Congress, and did little to improve conditions in energy, education or telecoms.

Investing In Mexico Today

Then last July Mexico changed course.

The PRI was re-elected under Enrique Pena Nieto, who was younger and more reformist than his predecessors. He was also more politically adept. Pena Nieto's first act in office was to do a deal with the opposition parties so he could get legislation through Congress.

Since then he has had the teachers' union head, accused of embezzling $200 million, arrested. He has gotten his party to agree to allow foreign investment in Pemex. And he has introduced legislation to allow foreign investment in telecoms, and if necessary break up Slim's near monopoly.

Of course, Mexicans will scowl if you suggest they're heading back to the days of Porfirio Diaz, because the PRI got to write all the history books and demonized him.

But that's where Mexico seems to be going, which is good news for investors.

In fact, there are examples all over the world where breaking a logjam like Mexico's went on to turbocharge growth.

India, which began reforms in the 1980s and accelerated them under Atal Bihari Vajpayee from 1998-2004, went from 0.3% per capita growth in the 1970s, to 3% in the 1980s, 4% in the 1990s and a full 6% since 2000.

Britain, as I remember well, also got a growth shot in the arm after Margaret Thatcher took over in 1979 and sorted out dead nationalized companies and other over-protected industries. Likewise, Chile went from 0.8% per capita growth in 1964-73 to 5.8% per capita growth in 1984-93 after reforms had taken place.

Since Mexico has had only 1% per capita growth in the last decade, that means there is quite a bit of long-term upside ahead. In fact, it may be a 100-year opportunity.

The short term picture looks pretty good, too. The Economist team of forecasters already puts Mexican growth at 3.7% in 2013 and 3.9% in 2014. Further, the Banco de Mexico has just cut interest rates from 4% to 3.5% (far too high for Ben Bernanke, of course) and that should help the economy, too.

Three Ways to Invest in Mexico

There are a number of ways to play Mexico, whose market currently trades on a 19 times P/E ratio, according to the Financial Times.

The iShares MSCI Capped Mexico Investible Market ETF (NYSE: EWW) has an ample market capitalization at $2.3 billion, a dividend yield of 1.3%, and an expense ratio of only 0.5%. However, being an index fund, 17% of its capitalization is Carlos Slim's company, America Movil.

The Mexico Fund (NYSE: MXF) is a closed-end fund which pays a quarterly dividend at a rate of 10% of net assets - that has the effect of holding the share price fairly close to net asset value; it's presently at a premium of 0.7%. Plus, it currently holds no America Movil.

Finally, one attractive Mexican company is Desarrolladora Homex S.a.b de CV ADR (NYSE: HXM), a Mexican homebuilder and prison-building company, which trades on a P/E of 6 times. With the Banco de Mexico's interest rate cut, housing can be expected to flourish in 2013 and Homex should share in the improvement.

So don't get caught up in what you've always believed about Mexico. The changes going on south of the border make for a great investment opportunity.

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About the Author

Martin Hutchinson is the Global Investing Specialist for Money Map Press. A British-born investment banker with more than 30 years of experience, Martin has worked on both Wall Street and Fleet Street. He is now the editor of the Permanent Wealth Investor, where he focuses on "Alpha Bulldog" stocks that pay high dividends covered by earnings. In his Merchant Banker Alert, Martin uncovers the fastest-growing companies in the fastest-growing economies and brings those ideas back home to you. For more information about these services, call our VIP Services group at 855.509.6600 or 410.622.3004.

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