Mexico's Foreign Investment Surges 48% as Nearshoring Booms
Comment of the Day

May 23 2023

Commentary by Eoin Treacy

Mexico's Foreign Investment Surges 48% as Nearshoring Booms

This article from Bloomberg may be of interest to subscribers. Here is a section: 

Aside from the capital, no state received more money than Nuevo Leon’s $2.3 billion. Jalisco received $1.2 billion, while Puebla and Mexico State followed with $0.9 billion each. The majority of the investment growth came from companies that expanded existing operations in Mexico.

“The greatest part of the foreign direct investment was reinvestment in utilities, which is related to the increase in the capacity of plants already installed by companies, and explained by the long-term perspective on export growth,” said Gabriela Siller, director of economic analysis at Banco Base.

The movement of companies from other parts of the world to just south of the US — a practice known as nearshoring — has generated buzz around Mexico’s production possibilities. Nearly $10 billion of the investment went to the manufacturing sector, while $6 billion went into financial services.

If the current pace continues, total investment for the year could reach $43 billion, Siller said. That would represent a 51% gain in total foreign direct investment from 2022 after $6.9 billion from the media merger and Aeromexico restructuring is excluded.

Eoin Treacy's view

Mexico’s GDP is around $1.27 trillion so inward investment approaching $100 billion in a year moves the needle for economic growth. At present Mexico is growing at around the pre-pandemic trend rate of 4%, and inflation (6.25%) continues to trend lower. Fiscal constraint has been a hallmark of AMLO’s presidency and that has helped to support the peso. In turn that has improved the perception of upside potential for foreign investors in the stock market.  

AMLO’s negative qualities include a penchant for vanity projects which are aimed at boosting support in rural areas without sufficient due diligence. The location of the recently expropriated land and railway suggests greater enthusiasm for expanding the rail line through the isthmus of Tehuantepec. 

The Panama canal has the unique advantage of existing. Nicaragua and Mexico both envy the prestige and income from hosting a major transcontinental conduit. Promoting the expansion plan is a vote winner in rural Mexico, but the primary trade route through the Panama canal is from the east coast of the USA to the Far East. Surely the inward investment in reshoring/near shoring is aimed at reducing traffic on that trade route?

The Peso is currently unwinding a short-term overbought condition.
The iShares MSCI Mexico ETF has returned to test the first area of potential support at the upper side of the underlying trading range.
Grupo Mexico has returned to test the region of the 1000-day MA. The twin challenges of an acquisitive government and falling metal prices are weighing on the share. It will need to rebound from this area if demand dominance is to the given the benefit of the doubt. 

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