Three years ago Pentagon analysts warned that Mexico risked becoming a “failed state”. They were “wildly wrong”, says The Economist. Not only has drug-related violence, which is concentrated in a few areas, abated, but the economy is in sound shape.
It should grow by almost 4% this year and it is raising its long-term potential growth rate thanks to an “ambitious” reform agenda, says Morgan Stanley.
Inflation has been conquered, public debt is under control, and private borrowings remain low. An increasingly competitive manufacturing sector and rising wages in China have prompted manufacturers focused on the US market to set up operations across the border. Mexico has already become the top exporter of flat-screen TVs and BlackBerrys.
Meanwhile, the new president, Enrique Peña Nieto, has announced new measures to liberalise the economy and boost productivity. The government will break up the duopoloy in free-to-air television by putting two new stations out to tender. Watering down the power of the teachers’ union, which has handed out jobs and promotions on the basis of contacts rather than merit, should improve standards in education, says the Financial Times.
Pemex, the state oil giant, will unfortunately remain in government hands, but opening up refining and transport of oil and gas to competition should hopefully stimulate more investment in the sector. Investors can access this encouraging long-term story with the London-listed ETF iShares MSCI Mexico IMI Capped Index fund (IMEX).
However, wait for the next dip before considering a purchase; the average price/earnings ratio of stocks in the fund is currently 18. The peso, meanwhile, is set for further gains against the dollar, says Morgan Stanley.