The Best Sectors for Investing in Mexico, Plus a Few to Watch

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When many Americans think about Mexico, they consider widespread poverty, endemic corruption, undocumented immigration, and an ongoing domestic drug war that has claimed more than 100,000 lives. And, to a greater or lesser degree, that's true. On the very surface of things, it seems investing in Mexico is the last thing anyone would want to do.

But to consider only these blighted facts is to miss out on the whole picture - a picture that, overall, looks very promising. Americans should be investing in Mexico.

Yes, Mexico faces a great many challenges, but it is dealing with those challenges. Talk of Mexico becoming a "failed state" is, frankly, ridiculous. Each day mail gets delivered, the trash is picked up, the lights come on, mass transit works, and food goes on the table. The truth is, there's tremendous opportunity in Mexico's rise.

Here are some other facts to consider...

Still worried about the peso's sudden, catastrophic crisis in 1994-95? Put those doubts aside. In nominal terms, Mexico has the world's 13th largest economy. By purchasing power parity, it ranks 11th.

Goldman Sachs and PriceWaterhouseCoopers call for Mexico to be the world's fifth or seventh largest economy by the year 2050. The World Bank considers Mexico an upper middle income country - an industrializing, emerging power.

For more than 70 years, until 2000, Mexico had been a de facto one-party state. But in 2000, the Institutional Revolutionary Party (PRI) lost the Presidency of the Republic, and, with the election of Vicente Fox, Mexico enjoyed political plurality. This addition of new political blood was a tremendous benefit to the Mexican economy, and successive administrations began to invest in infrastructure build-out.

The Mexican economy never looked back, and most of its sectors are growing nicely, or at least holding their own.

Several important factors make investing in Mexico a safe and attractive option for foreigners:

  • More than 90% of Mexico's exports take place under some form of free trade regime.
  • Scores of global companies across key sectors have an official presence in Mexico, even if they do not have full-fledged Mexican subsidiaries.
  • The strongest growth in the country is happening away from the violent regions near the American border.

Best Bets for Investing in Mexico

These sectors present the best potential for those who would like to start investing in Mexico:

  • Information Technology: The Market Next Door -- Mexico's less expensive, yet talented and diverse, labor pool has attracted billions from global IT companies, and the sector has grown with admirable bullishness. Mexico is now one of the world's top IT service exporters. Of course, it doesn't hurt that Mexico is located next door to the world's biggest consumer of IT services. The sector does about $15 billion worth of business per year and climbing. Some 600,000 Mexicans are employed in the IT field in a professional capacity. Government and private industry are working to build 24 technology parks in different states around the country, reflecting a new flexibility and vision in Mexico's leadership. Despite posting these impressive accomplishments already, the Mexican IT sector presents a real "ground floor" opportunity for savvy investors. Foreign investing in Mexico's IT sector is ramping up quickly, despite the country's well-publicized, violent drug war. In fact, companies like Honeywell International Inc. (NYSE:HON) and Lenovo Group Ltd (OTC ADR: LNVGY) are expanding their operations even in some of the hardest-hit areas. Bloombergreports that each day, some 9,000 managers cross from El Paso, TX, into Ciudad Juarez - one of the most violent cities on Earth - to commute to jobs in Mexico's new technology centers. Many American and Asian technology companies also have a strong presence throughout Mexico.
  • Construction: A Quiet Little Juggernaut -- Mexico is quietly becoming a regional industrial and manufacturing juggernaut. Cemex SAB de CV (NYSE:CX) is the world's largest construction company, and one of the world's five largest cement companies. Chances are that if anything is being built anywhere in the world, the project uses at least some Cemex cement. Even better, Cemex has surmounted its cash problems stemming from acquisitions over the past couple of years. A bet on Cemex is a bet on the continued growth of Mexico and the entire world.
  • Automotive: Global Marques Made Local -- After a period of decline in the 1980s, the Mexican automotive industry is back with a vengeance. It is strongly diversified and well-established. The American Big Three, Ford Motor Company (NYSE:F), Chrysler Group LLC, and General Motors Company (NYSE:GM) have done a solid business in Mexico since the 1930s, with many totally integrated production facilities. Volkswagen AG (OTC ADR: VLKAY) too, has a tremendous presence in Mexico. Many of Mexico City's legions of taxis are old Volkswagen Beetles. The iconic, classic Bug was made exclusively in Mexico until the last car, the Última Edición, rolled off the line to much fanfare in Puebla in 2003. Now, other carmakers are getting in on the action, with Porsche Automobil Holding (OTC ADR: POAHY), Daimler AG (OTC ADR: DDAIF) and Toyota Motor Corporation (NYSE ADR: TM) establishing operations in-country. In fact, fully 42 global automakers have at least some presence in Mexico.
  • Energy: A Sector for Watching and Waiting -- Mexico's natural resources are constitutionally protected as public property. But partial reforms have brought in more and more private industry, and there exists a fierce lobby to open up the country's resources to full private exploitation. In order to realize its full potential, the state-owned petroleum company, Petróleos Mexicanos, or Pemex, must begin to open up to foreign investment. The company does contract with private industry for most functions of the oil market. But those companies remain skittish. For example, Pemex recently opened bidding for rights to service six blocks in the Chicontepec onshore fields. In nearly any other oil-exporting economy, companies would be falling all over each other to get the rights. But Pemex contracted for only three of the six blocks, having had to cancel tenders for the other three blocks. Pemex simply failed to attract much interest, as profit margins shrink in Mexico's regulatory environment. However, the Chicontepec debacle may prove to be the straw that breaks the camel's back... Legislators are holding up the failure as a poster child for energy reform, and the debate is taking on an urgency that's never been seen before. Despite the trouble, this is a sector to watch intently. This could be a great way to start investing in Mexico once reforms go through.

Other sectors that could prove good avenues for investing in Mexico include aerospace and finance, as more companies seek to park their operations in the country and as more investors see the country as attractive. The rise of Mexico promises to make bold investors some serious returns.

The Mexican peso may be a safe bet these days, but what about the U.S. dollar? How safe is it? Click here for the eye-opening answer.