Historically, Mexico’s economic growth has been slower than other Latin American nations, averaging slightly over 2% annually from 1980 to 2022. However, a shift is underway, with Mexico’s economic expansion accelerating, driven by what some call ‘Deglobalization.’
This week, we’ll dive deeper into this market currently basking in the limelight.
Mexico Benefits as the US Shifts Localized Production Expansion
Mexico was among the earliest nations labeled as a developing economy when the phrase was introduced in the 1980. Over the years, it has faced several hallmark challenges of developing economies, including multiple financial and exchange rate crises. Today, however, Mexico is experiencing a renewed phase of growth, with its equity market ranking among the world’s top performers in recent years. As shown in the following chart, which tracks MSCI national indices, Mexico’s market has even outpaced India’s.
Mexico’s economic expansion has been largely fueled by the trend of relocating U.S. manufacturing operations to nearby countries. This shift, often called “regional production relocation,” involves moving portions of production to geographically closer nations. ✨ The concept allows businesses to retain the cost advantages associated with overseas production while significantly reducing worldwide supply chain vulnerabilities, minimizing time-zone disparities, and fostering stronger cultural compatibility.
This movement gained momentum during the U.S.-China trade dispute and the introduction of the trade pact between the U.S., Mexico, and Canada, which took over from NAFTA. The updated trade pact encourages firms to procure materials from across the North American region.
Recent developments have further incentivized companies to relocate their manufacturing operations nearby. Factors such as China’s prolonged lockdown measures, pandemic-induced supply chain breakdowns, and geopolitical tensions stemming from the Ukraine conflict have all contributed. Lately, commercial passage through the Suez and Panama Canals has also been hindered by regional instability and water shortages.
Beyond tariffs and transport concerns, China has ceased the inexpensive manufacturing hub it used to be, with wages in Mexico now significantly lower.
By mid-2023, Mexico had surpassed both Canada and China to become the leading trade partner of the United States. While a similar shift briefly took place in 2019,, the recent surge in Mexican imports suggests a longer-term transformation. Unlike U.S. commerce with China, as it heavily favors US imports.
Several major U.S. automakers, such as General Motors and Ford, have expanded their manufacturing operations in Mexico, whereas Tesla intends to establish $5 billion facility. Meanwhile, other major automakers such as Toyota, Audi… are making similar moves. Additionally, China’s electric vehicle leading company BYD is reportedly exploring the possibility of setting up a production facility in Mexico for secure access North American region.
While the automotive sector has attracted the most significant investments, manufacturers across various industries are also ramping up operations in Mexico. Notable U.S. firms such as Medtronic, Honeywell, along with Asian electronics powerhouses such as Samsung, Sony, have expanded their presence. This trend extends to suppliers as well, with several Tesla partners reportedly committing $1 billion to new plants in the northern region of Mexico to support production demands.
The following chart illustrates how capital capital allocation in the nation has reached its highest levels in decades:
Harnessing an Embedded Strength
Occasionally, some nations are fortunate to possess an inherent economic edge. For Mexico, its geographic closeness to the U.S., combined with the broader shift toward ‘de-globalization,’ has created this strategic edge.
The term de-globalization describes the recent slowdown in global trade. Several factors have played a role in this shift, but the COVID-19 pandemic and the ongoing the conflict in Ukraine has accelerated the process, prompting governments and businesses to reassess their reliance on potentially unstable external economies.
For certain countries, this transition has brought economic gains. In Mexico’s case, it has driven investment into industrial production and boosted export activity.
The immediate winners of this trend include construction firms, cement producers, and the labor force. Despite elevated price increases and borrowing costs exceeding 11%, Mexico’s jobless rate has has declined to its lowest level in two decades. The ripple effects extend to rising incomes and consumer spending, benefiting businesses that cater to domestic demand.
Mexico’s Equity Market Entering a Period of Transition
Mexico has approximately 140 publicly traded companies, featuring branches of major U.S. corporations such as Walmart, Kimberly-Clark. Additionally, Coca-Cola’s primary bottling associate (FEMSA), operates from Mexico.
Mexico’s stock indexes stand out globally due to their heavy weighting in essential goods, banking, and industrial materials. Notably, 5 of the biggest firms operate in food retailing. or manufacturers, while the remaining dominant players are primarily financial institutions and commodity-based firms. As a result, the broader index performance may not always align with the trajectory of Mexico’s fastest-growing businesses.
Mexico’s equity market’s valuation seems reasonable compared to historical benchmarks. One contributing factor is the robust earnings growth (meaning The earnings component in the Price/Earning ratio is high), although growth is anticipated to slow somewhat in 2024. The key focus current is how economic conditions unfold beyond 2024. The effects of the retreat from globalization and the move toward regional manufacturing, especially if joblessness remains low and consumer spending gains momentum.
Investing in Mexico Comes with Its Risks
Mexico presents an intriguing market with a promising outlook, yet it is full of risks. Investors have faced setbacks historically, mainly due to previous financial and exchange rate crises. Thankfully, Mexico’s financial situation is more stable now than historically, when the country frequently experienced the fallout from developing market spillover.
Today, Mexico’s economic landscape. is likely more influenced by the performance of the US economy; thus, any slowdown or financial turmoil in the US could significantly impact Mexico. However, for holder, such circumstances may also present unique opportunities.
Additionally, Mexico is holding a presidential race in the current year, that might lead to increased or decreased government intervention in critical sectors.
Mexico ETFs
Several ETFs track Mexican indexes. Remember that they tend to be heavily weighted in specific sectors, so it’s essential to understand their construction before investing. Examining the stocks held by these ETFs can be another effective way to identify companies for further research. Here are some of the largest Mexico-focused ETFs:
- iShares MSCI Mexico ETF (EWW) – Listed in the US
- Franklin FTSE Mexico ETF (FLMX) – Listed in the US
- Vanguard FTSE BIVA Mexico Index ETF (VMEX) – Listed in Mexico
- X Trackers MSCI Mexico UCITS ETF (XMEX) – Listed in the UK
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