Mexico eclipses Brazil

In the past few years, Brazil was the star of Latin America, while many wrote Mexico off as a violent US outpost. But now Brazil's growth is slumping due to cooling demand for its commodities. Meanwhile, Mexico is growing twice as fast. No wonder analysts and investors are taking a closer look.

One positive recent change is that the manufacturing sector is becoming increasingly competitive and sophisticated. The sector revived after Mexico joined the North American Free Trade Agreement in the 1990s, lowering tariffs, while a declining peso also helped. Now investment in areas such as technology and aerospace is increasing, while soaring labour costs in China make Mexico more appealing.

According to HSBC figures, in 2000 the average Chinese worker was paid 35 cents an hour compared to $1.72 in Mexico, says Edward Luce in the FT. Now the respective figures are $1.63 and $2.11. "Pretty soon Mexico will have the lower labour costs."

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Moreover, as a result of the manufacturing boom, "illegal immigration to the US has been in reverse for several years", says Luce. Mexican manufacturers continue to gain market share in America, notes Morgan Stanley. Industrial exports and output are at record highs, while domestic demand is also robust.

Inflation and the public finances are under control, while it is encouraging that the new government has pledged "to continue along the path of supply-side reform pursued by the previous government", says Economist.com.

A bill designed to liberalise the labour market is working its way through parliament. This "small step forward", says Bank of America Merrill Lynch, should allow Mexico better to exploit its rapidly growing working-age population. The government also intends to allow private competition into the state-owned oil sector.

All this adds up to an encouraging story, helping explain why Mexican stocks recently hit a record. A possible play on Mexico is the London-listed exchange-traded fund(ETF) iShares MSCI Mexico IMI Capped Index fund (IMEX).

However, it looks a bit pricey, so we would be inclined to wait for the next dip in global risk appetite before buying. Given Mexico's close links to the US, jitters over the fiscal cliff' later this year could cause a correction. In the meantime, Morgan Stanley remains bullish on the peso, especially against sterling.