The Mexican economy is benefiting from a manufacturing
renaissance, thanks in part to cheap labor allowing the country to
challenge China's hold on the global export business.
[caption id="attachment_72388" align="alignright" width="300"
caption="Textile factory, Michoacan, Mexico"]
Marco Oviedo from Barclays has published a research note stating
lagging Chinese manufacturing exports for a decade,
Mexico has taken the lead
post-2008-09. We believe this change is likely to be structural and
After China joined the World Trade Organization in 2001,
Mexico found itself in direct competition with the Asian behemoth
for the cheap manufacturing export business. China was making the
same things as Mexico at a much lower labor cost. As a result,
according to Barclays, competition from China erased
approximately 60 basis points of growth from the Mexican economy
each year from 2002 through 2006. But after lagging China's growth
on an almost 4-to-1 basis between 1997 and 2012, Mexico's
manufacturing exports are now growing at the same rate as China's
Barclays says the recession in Europe has hurt China's economy
more than the Mexican economy because 20% of China's exports go to
the European Union, whereas Mexico sends only 5% of its exports
there. Also labor costs in China have increased about 20% a
year on average between 2003 and 2011, while Mexico's labor
costs have stayed even. Mexican wages were only 40% higher than
China's in 2011, compared with six times as high in 2003. Barclays
also cites Mexico's younger demographic and advantageous geographic
proximity to the U.S.
Given high energy costs, this proximity has
the Mexican economy, particularly the automotive sector.
A review of the major Mexican exchange-traded fund (
), compared with the SPDR S&P 500 ETF (
), the iShares MSCI Emerging Markets Index Fund (
) and the iShares FTSE/Xinhua China 25 Index Fund (
), illustrates the phenomenon. Pay particular attention to recent
The chart above compares EWW with SPY over the past six months.
Clearly, there is a very high correlation. But over the same
period, compared with EEM, EWW has significantly diverged and
outperformed the emerging market index ETF.
EEM's exposure to the BRIC nations, whose economies are
struggling, is having an obvious impact. Compared with FXI's (red
line) six-month chart, EWW's (green line) performance is
Longer term, the contrasts are similar, especially the
Compared with EEM, EWW's divergence becomes particularly
apparent more recently.
Its high correlation with SPY has been consistent.
Given its North American location and improved labor costs,
Mexico should be considered one of the better developing markets.
However, the high correlation to the U.S. stock market results in a
sensitivity to U.S. economic problems. If the market continues to
rally in the U.S. and there are no significant negative
developments with direct impacts on Mexico, EWW should continue to
rise as well. But if the floor falls out from under the U.S.
economy, the Mexican economy will follow.
Even so, EWW is probably a better bet than its China-focused