Emerging markets are an exciting area of opportunity in 2024, with attractive valuations, enormous flows of funds pouring in, and catalysts, such as reshoring and nearshoring driving demand in key geographies.
Investing in Mexico as a beneficiary of production moving away from China offers a compelling thesis, especially considering the current global economic trends and geopolitical shifts.
This investment opportunity arises from a phenomenon known as “nearshoring,” which involves relocating production and supply chains closer to the end consumer market, primarily the United States in this context.
Nearshoring Trend and Mexico’s Appeal
Nearshoring to Mexico is gaining traction due to several factors. The COVID-19 pandemic and subsequent supply chain disruptions have intensified the need for more resilient and geographically closer production networks.
Mexico, with its free-trade agreements dating back to NAFTA and now under the USMCA framework, presents an attractive destination for companies looking to diversify away from China.
The geographic proximity to the U.S., coupled with preferential tariffs under USMCA, makes Mexico a logical choice for American companies looking to mitigate risks associated with distant supply chains.
Foreign Direct Investment (FDI) in Mexico
In 2022, the U.S. invested about $15 billion in Mexico, with European countries and Canada following suit. This investment is concentrated in manufacturing, particularly in the automotive sector, which relies on Mexico for a significant portion of parts production.
Chinese Investments in Mexico
Interestingly, Chinese investment in Mexico is also on the rise, albeit from a smaller base. This trend is partly driven by the U.S.-China trade tensions and higher tariffs imposed since 2018.
Chinese companies are increasingly viewing Mexico as a strategic location to circumvent these challenges and maintain access to the lucrative North American market. For instance, Chinese manufacturer Lingong Machinery Group is investing $5 billion in a new facility in Nuevo Leon, Mexico.
Challenges and Considerations
The investment landscape in Mexico is not without its challenges, though. The political environment under President López Obrador has introduced some uncertainty. Policies that have focused on strengthening the state’s role in the economy and centralizing business regulation could potentially deter foreign investment.
Additionally, issues like contract renegotiations and legal uncertainties in certain sectors might pose risks for investors.
The Future of Manufacturing in Mexico
Mexico’s role in the global manufacturing landscape is poised for change. Rising wages in China and the country’s rapid economic development have made Mexico an increasingly competitive alternative for manufacturing, especially in labor-intensive industries.
Closing Thoughts
In conclusion, Mexico presents a potentially significant investment opportunity as companies look to diversify away from China. Its geographic advantage, established trade agreements, and growing industrial infrastructure make it an attractive nearshoring destination.
The most liquid ETF for Mexico is EWW, which trades on average over two million units per day. This ETF is not currency hedged, so be aware that it does offer exposure to the Mexican peso as well.
However, investors need to navigate the challenges of the Mexican political and economic environment carefully. As global supply chains continue to evolve, Mexico’s role as a manufacturing hub is likely to grow, albeit with the need for strategic and careful investment approaches.
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