How to Profit from This New Manufacturing Superpower
I have noticed that many people go to great lengths to travel the world but inexplicably ignore sites in their own backyard. Take me for example. I have lived in Colorado for about 12 years and have yet to visit the Grand Canyon.
And while I have visited more than 30 countries around the globe, I have not even been to Mexico. When in San Diego with my family on multiple occasions, I took a pass being a bit spooked by all the headlines on border drug and gang violence.
As I have highlighted at Oxford Club investment summits over the past year, while Mexico’s challenges make headlines, its strengths are making money for investors.
And Mexico’s strength is that that it has emerged as a major manufacturing and industrial power.
Mexican Exports Hitting Record Highs
U.S. industrial production is still at pre-2007 levels while Mexico got back to this level in early 2011. 80% of Mexico’s exports are manufactured goods and trade now represents 60% of GDP – a figure that has more than tripled since 1980. Mexican exports hit a record high in April of this year.
My view is that Mexico is on the way to replacing China as the premier global manufacturing platform for selling into North and South American markets.
China’s huge advantage in labor costs is evaporating. In 2000, Mexico’s manufacturing wages were 240% higher than in China. Now they are only 12% higher and given all the logistical issues and transportation costs that come with shipping parts to China and then bringing the final product back you can easily see Mexico’s advantage.
Mexico’s competitive edge is supercharged by a weak peso policy that has pushed the peso down an incredible 1,500% against the dollar since 1987 (though the peso is beginning to trend upward).
This is why American, European, Japanese, South Korean and, yes, even China are falling over each other to invest in Mexican production facilities. One example is the recent opening of Italian tire maker Pirelli’s first ever plant in Mexico. This ties in with Mexican auto production which was up 20% in April year-over-year.
Mexico’s Geographical Edge
Always keep in mind Mexico’s geographical edge next to two huge markets and as a Pacific Rim country, ready access to Asia-Pacific markets.
Let’s take a moment and look at the big picture. While U.S. debt is approaching 90% of GDP, Mexico is at 27%. America’s budget deficit is 8.6% of GDP while Mexico is at 2.5%. In addition, inflation in Mexico is at a manageable 4.4% and, unlike Brazil, has no restrictions on capital inflows.
Mexico is open for business worldwide. Get a piece of the action but remember that picking the right stock for a country on an upward trend is not an afterthought – it is the most important part. One of my favorite picks – Grupo Simec (NYSE: SIM) – is up 13.7% so far this year while emerging markets as a whole are down 6.2%.
Simec provides the finished steel that goes into manufacnuring plants being built hand over fist by global companies taking advantage of Mexico’s edge. In 2011 sales were up 19%, operating income was up 123% while Simec posted in the first quarter of 2012 a 24% increase in net sales and a 145% jump in operating earnings. Sales within Mexico were up 33% as the company exports about half of its production.
The stock is still trading below book value, at merely 65% of sales and at only 6.4 times trailing earnings.
– Carl DelfeldSource: Investment U
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