Emerging Market You Haven't Considered

08/24/2012 9:15 am EST

Focus: GLOBAL

While heavyweights like China and Brazil struggle, one of the best country stock performances this year has been going on right under our noses, writes Dan Caplinger of The Motley Fool.

When most investors think of emerging markets, they tend to think of faraway exotic locales like Rio de Janeiro or Beijing. But those markets have largely floundered so far this year.

Meanwhile, a promising international market that's much closer to home for US investors has put up some surprisingly strong performance. Is it too late to get in, or does this hidden market have further to rise?

Later in this article, I'll reveal one country where stocks are earning some pretty strong returns. First, though, let's turn to better-known emerging markets to understand some of the challenges they're facing.

Emerging Headwinds
For years, China and Brazil have sustained growth rates that make the rest of the world envious. When you consider just how big a splash it made when China announced that its GDP growth fell to 7.6% in the second quarter—its slowest rate of growth in three years—you get a sense of just how strong the world's most populous country has been.

Brazil, meanwhile, has slowed even further, with 2.7% growth in 2011 expected to slow even further this year, before recovering somewhat in 2013.

Those slowdowns have had varying effects on stocks in those countries. Brazil's natural resource giants, Petrobras (PBR) and Vale (VALE), have had substantial declines in the past year, in part because they in turn depend on strength in China as one of their major markets. Among Chinese stocks, Internet giant Baidu (BIDU) hasn't been affected that much, but some lesser-known plays have stumbled and led to general weakness for the Shanghai Composite.

Viva Mexico!
By contrast, the Mexican stock market has risen strongly so far this year, with an ETF tracking the market jumping almost 17% year to date. In many ways, though, Mexico defies categorization, as it plays a unique role in the economy of the region.

From one perspective, Mexico benefits greatly from the economic opportunities from its neighbors to the north. With the US making up the vast majority of Mexico's exports, Mexico relies on US expansion and growth to help boost its own economy. With Canada also a member of the North American Free Trade Agreement, Mexico is able to take advantage of the Canadian market as well for trade.

On the other hand, though, Mexico is a gateway to the riches of Latin America. Sharing a language with most of the countries of Central and South America, Mexico overcomes one barrier that holds back many of its developed-nation counterparts.

Who's Winning?
You can see the way these aspects of the Mexican stock market play out in some of its most prosperous companies. America Movil (AMX), for instance, has done a good job of dominating its home market while expanding into the US through its Tracfone prepaid mobile business.

But it also competes against Telefonica (TEF) and other local rivals throughout Latin America. As the market still has plenty of capacity left to fill, America Movil has no shortage of growth opportunities left to it.

Meanwhile, Cemex (CX) shows just how vulnerable some Mexican companies are to the whims of the economy. The company plunged well below its 2009 lows late last year as the housing and construction business reduced global demand for its cement products, but since then, the stock has doubled on hopes of a recovery as well as its having weathered its own debt crisis.

Take a Closer Look
Mexico may not be on most investors' radar screens, but its success shouldn't come as a huge surprise to intrepid investors. If you never look beyond the obvious investing plays, you'll miss forgotten markets like Mexico's.

But the best time to discover those markets is before they enjoy their big gains, not after. The rise in the Mexican stock market may not be over yet, but getting in now still means that you've missed a big part of the potential profits you could have made.

Read more from The Motley Fool here...

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