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Editorial See other Editorial Articles Title: Is Mexico a Country on Fire? Is Mexico a Country on Fire? by: Frank Holmes January 18, 2011 | about: EWW Just a three-hour drive from our offices in San Antonio lies an entrance to Mexico, one of the most promising but precarious investment opportunities in global markets. Like stepping on an ant hill, President Felipe Calderons war against the drug cartels has created chaos but the countrys economy has proven much tougher than many thought. San Antonios economy has been a direct benefactor of the turmoil as wealthy Mexican citizens have migrated to the area, invigorating the local economy with new entrepreneurial capital and stimulating the high-end real estate market, according to the San Antonio Express-News. One reason theyve moved their families here is the increased threat of kidnapping as the faltering cartels look to subsidize their businesses. This isnt a new phenomenon. Do you remember 2004s Man on Fire? In this movie, an ex-CIA agent, played by Denzel Washington, reigns fury on the criminals and corrupt cops responsible for kidnapping a 9-year-old child he was hired to protect. The movie had a major impact on people like me, living so close to the border. This past weekend, 60 Minutes featured the story of Edelmiro Cavazos, an up-and-coming star in Mexicos political arena who was kidnapped and murdered by corrupt policeman linked to the drug cartels in August. (Watch the 60 Minutes Piece) Mexican markets have stood in the face of this turmoil and soldiered on. Over the past three months or so Mexicos stock market, the BOLSA, has more than doubled the performance of the MSCI Emerging Markets Index, 19.19 percent versus 8.45 percent, respectively. (Click charts to expand) Mexico Bolsa Index Sometimes things have to get worse before they can get better. Its true2010 ranks as the deadliest year yet in Mexicos war against the drug cartels, with 11,041 drug-related deaths as of mid-December, representing a 385 percent increase since 2007, according to global intelligence firm Stratfor. Drug Related Deaths But that doesnt tell the whole story. The high number of deaths is likely a result from the capturing and killing of several kingpins which set off a power struggle among the remaining crooks. You might think this has created a modern-day Tombstone but the law enforcement captures have left many of the cartels significantly weaker. When you look closely at Mexicos economy, you see that it is well-positioned to benefit from improvement in the U.S. For starters, Mexico offers some 1.5 times leverage to U.S. markets. This means that if the U.S. GDP is set to grow 3 percent, the Mexican economy can grow 4.5-5 percent. The key to Mexicos economy is the United States. Roughly 80 percent of Mexicos exports are postmarked for the U.S. These are exports like cars, textiles and even electronics. No surprise then that 2010s U.S. recovery had quite the ripple-effect to Mexicos export sector. This chart from Greg Weldon shows that Mexicos total monthly exports have risen well off of their 2009 lows and are now at record high levels, exceeding those seen before the global recession. Monthly Exports Weldon reports that exports jumped 6.2 percent from October to November last year for a total of $28.2 billiona 26 percent year-over-year rate of growth. In addition, the growth is broad-based, touching the agricultural, manufacturing, automobile and non-oil sectors. Another key export for Mexicos economy is people. The Mexico-U.S. border is the top cross-border migration corridor in the world with an annual flow of 11.6 million migrants. The Russia-Ukraine border ranks second with 3.7 million migrants, according to Scotia Capital. Roughly 10 percent of Mexicos population lives outside of Mexico, mostly in the United States. Remittances, or money sent home from a foreign country, from these immigrants represent 3 percent of Mexicos total GDP. Scotia estimates that there is an 86 percent correlation between remittances and retail sales in Mexico. This time last year, remittances were at a five-year low because of job destruction in the U.S. which hit the Hispanic population especially hard. The Latin labor force had an unemployment rate of 12.1 percent and 12.5 percent in 2009 and 2010, respectively, according to Scotia Capital. This is significantly higher than the U.S., which saw unemployment rates of 9.3 percent and 9.6 percent over the same time periods. Its no surprise then that the recovery in the U.S. job market has led to a recovery in remittances and trickled down into Mexicos retail sales. This next chart from Weldon shows the year-over-year change in Mexicos retail sales since 2001. After bottoming in mid-2009, the year-over-year change has remained positive since April 2010. For the Love of Gold As of October, retail sales in Mexico posted a 4.4 percent year-over-year changemore than twice the level seen in July, according to Weldon. Weldon also reports that outstanding performing loansmeaning those that are up to date on paymentshave just reached a new record high. As investment managers, we dont have the luxury of just reading the headlines. Theres always much more to the story. Were aware of the violence and the threat that it poses. However, contrary to what many people think, it appears investors in Mexico can sit back, pop open a Corona and ride the wave of a U.S. economic recovery. John Derrick, Director of Research for U.S. Global Investors, contributed to this commentary. Disclosure: No positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. About the author: Frank Holmes Frank Holmes picture Frank Holmes is CEO and chief investment officer of U.S. Global Investors, Inc., a boutique investment advisory firm based in San Antonio that manages domestic and offshore funds specializing in the natural resources and emerging markets sectors. The companys no-load mutual funds include the... More * Company: U.S. Global Investors * Blog: Frank Talk: Insights for Investors * Book: Goldwatcher: Demystifying Gold Investing 423 Followers 1 F
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