Mexico has never had a reputation for being a bastion of economic and political stability. Nevertheless, investors from within and abroad have demonstrated their trust in this emerging market by investing heavily in Mexico. The country's equity markets have soared over the past year, strongly fueled by foreign investors, who own nearly 45 percent of Mexican shares.
The Bolsa index, composed of the 35 most liquid stocks on the BMV (Bolsa Mexicana de Valores), Mexico's main stock exchange, has risen in value over 40 percent during the past year. Comparatively, the Dow Jones has gained less than five percent over the same period, while the S&P 500 has gained less than 10 percent. Interestingly enough, this has come at the heels of good, but hardly spectacular, economic growth - Mexican GDP growth was approximately three percent during the past year, similar to the United States.
Low interest rates have increased bank lending, leading to the expansion of local businesses. Rising oil prices have also boosted Mexico's income significantly because of the abundance of this valuable natural resource. Additionally, Mexican government bonds are currently rated investment-grade, giving investors around the world confidence in the stability of Mexico's economy.
Reformed banking operations have also led to a Mexican housing boom many times greater than its counterpart in the United States. It is now easier than ever for middle class individuals to obtain an affordable mortgage, which besides increasing homeownership, has resulted in a surge in stock prices for Mexican housing developers. Additionally, Todd McClone, the co-manager of the Emerging Markets Growth Fund of William Blair & Co., claims that there is still a housing deficit in Mexico, leaving more room for future growth in the housing development industry.
As well as things are going for Mexico, it might not take much to put an end to this bull market. Exports are an enormous part of Mexico's economy, leaving the nation's economy highly dependent on other countries. The most critical of such exports is oil. As the world's ninth largest exporter, a sharp decline in the price of oil could send shockwaves through the economy. Additionally, a significant majority of Mexico's exports go to the United States, thanks to the North American Free Trade Association (NAFTA) Pact. As history has shown, this leaves the economy of Mexico highly dependent on that of the United States. Thus, any significant fluctuation in America's economy would be felt strongly throughout Mexico.
Another perilous feature of Mexico's economy is the possibility that the market is already overvalued due to the over-purchasing of stock in Mexico's largest corporations. This is due to the fact that that when investors learn of the nation's bull market, the first places they flock are the companies of which they have heard. Furthermore, there are 65 Mexican corporations that trade in the United States. The ease that foreign investors have in purchasing these specific companies may be driving up the prices of these shares to unsustainable values in comparison to less liquid shares.
The ease of investing in Mexico has given rise to new programs available to foreign investors. Thanks to American depository receipts (ADRs) - claims on foreign stocks - Mexican shares trade heavily in the United States. They are created when an American bank buys a substantial amount of shares in an international corporation. The bank then prints ADRs, with each receipt representing a specified number of shares in the corporation. These ADRs are then sold to investors in dollars, either over-the-counter or through an exchange. Because 65 companies trade as ADRs in the United States, it is easy for any investor to buy a piece of a Mexican company.
Another great opportunity can be found in a very successful exchange traded fund (ETF): the iShares MSCI Mexico Index (Ticker: EWW). The ETF, comprised of a collection of stocks traded mostly on the Bolsa Mexicana de Valores, has risen in value approximately 60 percent during the pasty twelve months.
Additional instability may also stem from Mexico's shaky political past. Elections, such as this year's upcoming one, have frequently caused chaos in Mexico's financial markets. If voters elect a president perceived as too economically left-wing, it would not be surprising to see investors dump their Mexican investments quickly.
As long as Mexico continues to provide extraordinary returns, investors will continue to speculate on the nation's markets. A stable economy and strong business growth are continuing to entice many who once deemed Mexico a market too uncertain in which to invest. Nevertheless, it is important to remain cautious. The international economy and the price of oil still remain vital factors in the future of Mexico's financial markets. That said, if the outside and inside forces that dominate Mexico's economy remain stable, the current bull market may continue well into the future.
