Famous Contrarian is Bullish on Mexico
Famous contrarian Dr. Marc Faber, author of the
Gloom, Boom and Doom Report, recently sat down with Bloomberg
news to give his current views on the global economy.
Dr. Faber remains bullish on gold and silver and
he anticipates a huge spike in U.S. inflation - nothing new there.
However, I was quite surprised to see how bullish he is on the Mexican
economy.
***According to Dr. Faber, Mexico, the thirteenth
largest economy in the world, is largely misunderstood. Most investors
seeking emerging market exposure focus on the BRIC countries. But as
Faber points out, Mexico is one of the world's largest developing
economies as measured by GDP. On a per capita basis, the Mexican economy
is larger than China, India and Brazil.
It is true that our neighbors to the south are
coming back from one of the country's worst recessions on record. Reports
of upward revisions in growth could translate into the potential for a
good long-term investment.
Dr. Faber seems to think so. He continues to be
pleasantly surprised by how well the Mexican economy is doing and he
thinks it will continue to outperform most emerging markets over the
long-term. The following chart from Bloomberg shows Mexico's
outperformance.
His reasoning is as follows; ten years ago Mexican
wage rates were 270 percent greater than China's. Now Mexico's wages are
only 45 percent higher than China's, and they are trending lower. What
this means is that over the next 5-10 years we could see Mexico take over
the manufacturing prowess that China currently holds, particularly with
Mexico's close proximity to the United States. In theory, as the Mexican
wage rate trends lower in comparison to China's, Mexico will attract more
manufacturing jobs - thereby growing its middle-class and its
economy.
If Dr. Faber is correct, and the Mexican economy
is going to outperform the majority of global markets, investors want to
have their portfolio's positioned accordingly. How can small cap
investors take advantage of the opportunity?
***Look no further than the Global X Mexico Small
Cap ETF (ARCA: MEXS). The ETF was appropriately launched on 'Cinco de
Mayo' (Mexicans recognize their army's unlikely defeat of the French at
the Battle of Puebla in 1862 on this day) of this past year. It is the
first ETF to target Mexican small-cap companies and provides an excellent
opportunity to play Mexico's ongoing domestic growth story.
With only 28 holdings and seventy-two percent of
the holdings heavily weighted towards consumer discretionaries,
industrials and consumer staples, this ETF offers a targeted approach to
the country's local economy.
There are a couple of drawbacks to the MEXS
however. While I like the idea of investing in Mexico's growing economy,
I am a bit concerned by the low average volume and market capitalization
of the ETF. It has an average volume of only 4,013 shares a day. However,
given the potential long-term growth prospects in Mexico, I do not want
to miss out on what I think is an excellent investment
opportunity.
Therefore, until more volume moves into MEXS I
would opt to invest in the first Mexican ETF, iShares MSCI Mexico
Investable Market Index Fund (NYSE: EWW). The fund was launched over 15
years ago and uses a mix of small, mid and large-cap stocks. More
importantly the average volume is over two million.
So as much as I would like to invest in Mexican
small caps, I always steer clear from low-volume ETFs until they pick up
in popularity with investors. Low-volume ETFs have a greater risk of
being folded by the fund provider, and if this small cap ETF doesn't
catch on soon, I could see it having a similar fate.
Again, I would prefer move into EWW to take advantage of the Mexican economy and patiently sit on the sidelines, keeping a close eye on the volume to take a position in MEXS.
