Why Mexican Stocks Could Be the Big U.S.-China Trade War Winner

mexico compass word profits

As the trade war rages on, I have always thought that America’s smartest China strategy begins in our own backyard. The Mexican and American economies and stock markets can both be taken to the next level by sharply increased investment and trade. Naturally, that would be good news for Mexican stocks. More on those in a bit.

Improved investment and trade outside of China could reduce some immigration pressures by creating better jobs in Mexico and America while also expanding U.S. exports to Mexico and South America.

It could also be good news for American manufacturers and, in an odd twist, American workers. The reason is that about 40% of the content of goods assembled in Mexico and shipped out as exports to America are made in America.

In other words, a washing machine assembled in Mexico and exported to America has about 40% of its components made in America.

In sharp contrast, for products assembled in China and then exported to America – only 4% of the content is made in America. Think an iPhone, for example. Almost all of its components are sourced in Asia.

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So U.S. imports of Mexican products are 10 times better for American workers when compared with Chinese imports.

Let’s take a deeper look at this interesting situation and opportunity.

China’s Loss is Mexico’s (and America’s) Gain

According to consultant Alix Partners, Mexico has for some time surpassed China as the cheapest country in the world for companies looking to manufacture products to sell into North American and South American markets.

In addition to the cost factor, flexibility, speed of response and quality all point to North America over China. This is why American bilateral trade with Mexico has been up sharply since 2010.

Ironically, these trends have led to even Chinese companies moving production to Mexico to capitalize on the trade advantages that come from geographic proximity. I sure hope the new re-jiggered NAFTA trade deal, still mired in Congress, ensures that Chinese firms don’t exploit this giant loophole.

The American/Mexican Global Manufacturing & Trading Platform

U.S. companies and workers are finally realizing that, while of course a stronger U.S. manufacturing base is important, Mexico is clearly a better option than China to manufacture some of the goods for U.S. and Latin American consumer markets.

Analysts are calling it “near shoring,” “in shoring” or “reverse globalization.” The U.S. is already the biggest foreign direct investor in Mexico, accounting for 45% of all foreign investment according to State Department sources.

How will all this shake out and what will American Congressmen and women (and U.S. labor groups) think of U.S. multinationals shifting some manufacturing from China to Mexico?

American firms still export three times as much to Mexico as they do to China. And Mexico, in turn, sends 80% of its exports back across U.S. borders. In comparison, Mexico’s exports to its giant neighbor to the south, Brazil, accounted for only 1% of its exports.

Mexico has also launched more free-trade agreements that involve in excess of 40 countries – more than any other country and enough to cover more than 90% of the country’s foreign trade.

One advantage? Mexican goods can be exported duty-free to the United States, Canada, the European Union, most of Central and Latin America, and to Japan.

Invest in Mexican Stocks – and This ETF

So how should investors play this “platform” for its combination of low costs and entry into a well-diversified blend of North American markets?

An easy way is through the iShares Mexico (EWW) exchange-traded fund (ETF).

I’ll be featuring specific Mexican stocks that trade on the NYSE in my Cabot Global Stocks Explorer (formerly Cabot Emerging Markets Investor) advisory, but Mexico will definitely need some top-flight engineering and construction equipment and America is in the first lane with Aecom (ACM) and Caterpillar (CAT).

This strong emerging trend is just starting but you can see how current trends could lead to North America, not Asia, becoming the world’s leading manufacturing platform.

This can be great news for America and its neighbors, particularly Mexico.

Investors acting on this opportunity should turn their attention to Mexican stocks. And if you want to know which ones I’ll be recommending, click here.

Carl Delfeld

The Best Stocks in the World

Carl Delfeld is your guide to growth trends and bull markets around the world. His Cabot Global Stocks Explorer will show you the vast profit potential of investing in emerging economies as well as other world stock markets.

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