Ratings Upgrade: Mexico Set to Outperform NASDAQ
go to original June 2, 2012

The 7.6% drop in the Mexican peso this month may be a blessing in disguise for investors in the country's equities.

The Mexican peso peaked at around MXN 12.65 per dollar in early February and spent most of the first quarter at that level. Since the beginning of the second quarter however, it has declined steadily, ending the month almost 11% weaker.

While a weaker currency can increase inflationary pressures, it also makes exports cheaper to markets abroad. Exports account for about 30% of Mexico's economy.

With 80% of exports destined for the United States, the country is much less reliant on China or Europe relative to other emerging markets.

Besides making exports more competitive against foreign competitors, a weakening Mexican peso also means increased profits when funds are repatriated from the stronger currency.

Mexico recorded its fastest growth since 2010 in this year's first quarter at 4.6% from the period a year earlier. Exports increased 3.4% to a record $32.4 billion in the last month of the quarter and the country reported its highest trade surplus since 1985.

While recent economic data out of the U.S.shows a slight moderation in the pace of the recovery, GDP growth should still come in around 2% for the year, promising a stable source of demand for Mexican goods.

Given the resilience in the U.S.economy and the opportunity for Mexican companies to surprise on second quarter numbers due to the Mexican peso, investors may want to increase their allocation to either individual names or the overall market.

The iShares MSCI Mexico Investable Market offers the most diversified exposure into the market. The fund holds a large weighting in consumer staples (31.9%), telecommunications (24.3%) and materials (15.3%) with smaller weights across consumer discretionary, industrials and financials.

Additionally, the fund 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 11.3 times trailing earnings.

For individual names, investors could look to companies with export business to the United States like Cemex which produces and sells cement and construction materials worldwide. The company beat analyst expectations in the first quarter on a 35% increase in sales to the U.S. market.

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