Second quarter GDP growth for the Mexican economy is due out
this week with analysts expecting a slower pace of growth
compared to the first quarter: 0.8% versus 1.3%.
[caption id="attachment_70951" align="alignright" width="300"
caption="Campeche is a beautiful city in Yucatan, Mexico. The city
is classified "Patrimony of UNESCO"."]
[/caption]
The Mexican economy has been fairly insulated from global
headline risks this year due to greater reliance on U.S.
manufacturing demand and strong domestic sentiment leading up to
the presidential election in July.
Sales at supermarkets, department and specialty
stores increased
on a year-over-year basis In July, though the 3.6% pace was well
below the 7.9% growth for June. Despite a more sluggish picture in
external markets and exports, domestic demand continues to support
the Mexican economy.
Inflation of 4.34% in the Mexican economy is still fairly
benign, though just outside of the target range set by the central
bank. The International Labor Organization estimates the workforce
will grow by 20% in the decade to 2020, well above growth of about
14% in Brazil and Argentina. While labor force growth -- a key
component of economic growth -- is supportive, it will also test
the government's ability to bring down the
5% unemployment rate
. This level of joblessness may seem idyllic compared to more than
8% in the United States, but it is still well above the twelve-year
average of 3.6% and could cause some political risk.
I am still cautious on shares of Grupo Televisa (
TV
,
quote
), though the long-term theme for the market remains strong. The
company is the largest media conglomerate in the Spanish-speaking
world with operations principally in Mexico and the United States.
Revenues at the company grew 11.7% year over year in the second
quarter with strong operating margins of 28%, better than
performance at 88% of its large cap peers in the same period.
Shares are priced relatively expensively at 24 times trailing
earnings and royalties from the Univision licensing agreement are
uncertain with the launch of the Fox Network's (
NWS
,
quote
) MundoFox channel.
The iShares MSCI Mexico Investable Market (
EWW
,
quote
) offers the most diversified exposure into the Mexican economy.
The fund holds a large weighting in consumer staples (31.9%),
Telecommunications (24.3%) and Materials (15.3%) with smaller
weight across consumer discretionary, industrials and financials.
The fund also allows investors access to many companies not listed
as ADRs in the U.S. market. The fund pays a 1.5% dividend yield and
trades for approximately 15 times trailing earnings.
While long-term growth and relative outperformance remains
intact, the
outlook for the Mexican economy for the rest of the year
is not as rosy. We are lowering the country's ranking to neutral
until valuations become more attractive or the economic picture in
the United States supports growth.
