Mexico Takes Off

Building construction in Mexico City

The economy is growing at its fastest pace in six years, the stock market is at an all-time high, the homebuilding industry is thriving, and consumer spending pushed Wal-Mart's profit up 26% last quarter.

We are not talking about the United States. We are talking about Mexico, a country most Americans think of only in terms of illegal immigration. But as workers keep streaming north, money is heading south. Foreign direct investment in Mexico rose more than 6% last year to nearly $19 billion, according to the Economy Ministry. Every broker or investment banker wants a piece of the action.

"It's a really exciting time for the domestic capital markets in Mexico," says Peter Goettler, who heads investment banking and debt capital for U.K.-based Barclays. New laws allow pension plans to invest in financial instruments other than government and corporate debt, which has created an explosion in investment in equities. Barclays has invested $100 million in Mexico. The company's iShares, its branded exchange traded funds, are now offered on the Mexican Stock Exchange and account for 15% of total daily trading volume.

Oh Mexico

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While many of the hottest stocks in Mexico like homebuilder Homex and wireless carrier American Movil trade on the New York Stock Exchange, others are not available here. Wal-Mart de Mexico, for example, trades only over the counter in the US. However, so many brokerages have now opened offices in Mexico City that many Americans can often buy stocks directly on the Mexican exchange. However, that usually means those stocks are bought in pesos, not dollars, which carries some risk.

There are other risks as well. The economy remains tied to the fortunes of the U.S., which buys about 85% of its exports. Mexican economic growth in the fourth quarter of 2006 began to slow and inflation began to rise. Oil production, which accounts for 40% of government revenues, has started to drop. The amount of money Mexicans in the U.S. sent home was flat the last two months of the year.

Mexico City Stock Exchange: The Bolsa Mexicana de Valores (BMV)

Some believe the Mexican stock index, the IPC, may give back some ground after soaring 54% in the past year, when other emerging markets also posted impressive gains. But few predict the market, or the economy, will stall, even if those in the U.S. stumble.

"I think the effect will be less this time compared to previous U.S. slowdowns," says Damian Fraser, head of Latin American strategy for UBS. "Mexico has some domestic engines of growth that can help offset any U.S. weakness."

Those include a booming housing market trying to meet a so-called housing deficit estimated at 4.2 million homes. Easier financing, lower interest rates, and government-subsidized programs for low-income homebuyers have created an unprecedented opportunity for builders.

The banking industry is expanding with new players like Wal-Mart. Yes, Wal-Mart, the company fighting to open a bank in the U.S., has seen the red carpet rolled out for it in Mexico. Why? The Mexican government would like Wal-Mart to help bring the 80% of the Mexican population without a bank account into the formal economy, so they can be taxed.

Speaking of taxes. Mexicans don't have to pay capital gain taxes on stocks traded on the national exchange. No wonder Mexican billionaire Carlos Slim is the third richest man in the world and starting to close in on the man No. 2 on the list, Warren Buffett.

Mexican Market En Fuego
Foreign direct investment in Mexico rose more than 6% last year, and foreign money makes up 70% of daily trading volume on the Bolsa. CNBC's Jane Wells has the details.
^{Thurs. Feb. 22 2007 | 8:20:00 AM [03:59]}