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By Martin Hutchinson
You didn't have to go all the way to Asia to profit from stocks this year; the Mexico market, just down the turnpike, has done just fine, up about 16% year to date – roughly double the gains of such bellwether U.S. indices as the blue-chip-laden Dow Jones Industrial Average. Mexico has traditionally been viewed as a sluggish, badly run economy, but under new President Felipe Calderon, in office since last December, the outlook appears to be improving.
Mexico went off the rails with the Revolution of 1912, which deposed the economically successful Porfirio Diaz dictatorship, and replaced it with the Institutional Revolution Party (PRI), which nationalized Mexico's oil reserves in the 1930s, and then pursued a heavily socialist – and somewhat eccentric – economic policy until 1988.
I was there as a banker in 1981, and remember my very eminent, elderly Mexican client explaining to me that Mexico was a vibrant example of how the economic theories of Cambridge socialist Joan Robinson [who believed that the state should set the prices of everything] worked remarkably well. That was about 9 months before the Mexican economy collapsed altogether [yet again] and then repudiated all its debt – there are still buyers on that deal who financiers wouldn't want to meet on a lonely street corner on a dark night!
Mexican productivity, as reported by the Conference Board and Groningen Group Total Economy Database, actually declined for 15 consecutive years from 1981 to 1996, dropping back a total of 25%, or roughly 1.9% per annum.
After 1988, the situation improved a bit in terms of economic policy – but not at all in terms of corruption. The 1990 privatization of what is now Telefonos de Mexico SA, or Telmex (TMX), in which Carlos Slim was able to take over an asset that has enabled him to become richer then either Berkshire Hathaway Inc. (BRK.A, BRK.B) Chairman and Microsoft Corp. (MSFT) Chairman , was a case in point. You know something's wrong with an economy when its leading businessmen are richer than those of the United States, a developed country with 15 times its Gross Domestic Product (GDP). Quite frankly, it doesn't encourage you to put your own hard-earned savings to work in a market when the playing field is tilted so sharply against the small businessman and small investor.
Mexico's prospects were supposed to improve when the PRI was voted out of office in 2000, but they didn't. The new president, Vicente Fox of the National Action Party (PAN), was faced with a solid PRI/left majority in Congress, and was in any case far too cautious. The upshot: Not much was achieved and Mexico continued to stagnate.
For example, national oil company Petróleos Mexicanos, also known as Pemex, and , or CFE, the state electricity company, continued under public ownership even though both companies could have generated fortunes in wealth and profits had they been properly run – given the soaring increases in energy prices and the fact that the rich United States was situated right next door.
In 2006, PAN's Calderon won a nail-biter of a presidential election, but his Congressional results were rather better, and the PAN of today is close to an overall majority. Nobody's expecting rapid privatization of Pemex and CFE, unfortunately, but in other areas Mexico's economic policy has been pretty sound, and the Mexican economy has grown rather faster than usual – at about 5.9% in the latest quarter, for example.
However, you have to discount that by Mexico's rapid population growth of more than 1% per annum, which puts a huge strain on Mexican infrastructure, such as schools and roads, and is the principal cause of the U.S. illegal immigrant problem.
Nevertheless, as Calderon clears out the worst of the old PRI barons at Pemex, the company can produce a lot more revenue for Mexico at times such as the present when crude oil prices are so high. Mexican productivity, which increased at a gentle 1.4% from 1996 to 2006, has showed signs of accelerating recently, with a 4% increase in 2006 and continued growth in 2007.
A modest exposure to Mexico thus seems sensible. And there are two ways to achieve that.
The first way to play Mexico is to go the route of the exchange-traded fund, or ETF, such as the IShares MSCI Fund (EWW), which invests in the Morgan Stanley (MS) Capital International index. With total assets of $1.6 billion, this is an ETF that definitely has the adequate liquidity we always look for, but don't always find.
The second strategy is to invest in a Mexican company itself. The two most prominent companies that are fully Mexican controlled are the telephone company, Telmex (TMX), and the multinational cement producer Cemex S.A. B de C.V, better known as Cemex (CX).
Both companies currently trade at reasonable earnings multiples: Telmex carries a Price/Earnings ratio of about 13, while Cemex is actually trading at less than 10 times earnings.
Of the two, I would regard Cemex as a more interesting company, because it is forced to compete all over the world, especially after having bought cement operations worldwide [since cement is much too heavy to ship economically, it is a product you have to produce in local markets, close to your end-user customer]. Telmex, no matter how rich it has made Mr. Slim, remains primarily a rather sleepy near-monopoly that still gets most of its revenue from its home market in Mexico, and whose international diversification is really limited to the adjacent U.S. and Latin American markets.
You don't want to bet your entire bankroll on the potential success of President Felipe Calderon and the Mexican economy, but it's certainly worth a modest investment, and promises a nice profit.
News and Related Story Links:
- Bloomberg News:
Slim's Telmex to Spin Off Operation Outside of Mexico.
Mexico President Felipe Calderon.
- Web Site:
Mexican Revolution (1912).
- Cambridge Journal of Economics:
Joan Robinson and Socialist Planning in the Years of High Theory.