Investing in Mexico has been on my radar for over a year. Lately, I have highlighted a few investments in the Mexican market that have either been long-term winners or intriguing new ways to invest in Mexico’s economic growth and rising prosperity. A lot of things have been working in the country’s favor, explains Tyler Crowe, author of Misfit Alpha.
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While the updated North American trade deals have been a large part of the favorable business environment, several other elements are helping to boost the prospects of Mexican markets. One of the big investing themes outside the tech world is nearshoring, friendshoring, or whatever euphemism you want to use to say “decrease reliance on Chinese manufacturing.”
We’re seeing big efforts to boost industrial output in the US for essential items the modern economy needs: Semiconductors, special mineral mining, renewable energy equipment, and so on. But this investment trend isn’t unique to the US. One could argue that Mexico is a greater beneficiary of these trends because in addition to Mexico’s free trade agreement with its North American neighbors, it has established free trade agreements with 48 other countries.
Mexico’s industrial sector also has some structural cost advantages over other places. For one, the cost of labor in Mexico is already globally competitive. The average manufacturing labor rates are lower than those in China and on par with other fast-growing manufacturing areas like Vietnam. Mexican manufacturing also benefits from lower real estate and energy costs than many other global manufacturing centers.
The challenge for most investors is that there aren’t many publicly traded manufacturing companies with significant exposure to Mexico. Most of the manufacturing is either large multinationals or private third-party suppliers. Of the 144 companies listed on Mexbol, only eight are in industrial manufacturing.
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Mexbol is an exchange almost completely devoid of technology companies, too. Most of the market is in consumer goods (manufacturing or retailing), construction, transportation, extractives, real estate, or financial services.
While I’m still forming more coherent thoughts on the results of a recent investing screen I ran, here are some knee-jerk reactions:
- Real estate and related subjects have been some of the best performing companies: Of the companies that have beaten the market, real estate, construction, and building products have generated the best returns. I don’t find this too surprising as the first beneficiaries of the country’s manufacturing capacity expansion are the ones building out the infrastructure to increase capacity.
- Real Estate Investment Trusts (REITs) carry much less debt in Mexico: The highest debt-to-capital ratio for the real estate companies on my screening list was 33%, yet all of them produced double-digit returns on equity.
- There isn’t a huge valuation premium for returns here: Only seven companies were trading for more than 20 times free cash flow, and a decent number of them were trading for single-digit free cash flow multiples. It certainly doesn’t tell the whole story, but the numbers suggest many opportunities to explore.
