The Next China
China’s run as the world’s economic engine is starting to wind down.
For the last 20 years China has grown into a global economic powerhouse.
Its rise as the world’s manufacturing capital drove prices for goods down around the world, sparked a major commodities boom, and is still keeping a floor in oil prices.
A number of factors are set to be a drag on China’s economic role in the world.
China’s becoming more politically unstable.
Its complicated system of government-driven capitalism has become far less friendly to foreign business.
And, as you’ll see below, Chinese labor isn’t as relatively cheap as it once was.
Altogether, China has become a lot of trouble for businesses while the benefits are far less lucrative.
Companies are pulling out of China and they’re eyeing different countries for future investments.
One of those that has the opportunity to take a big share of what China had is Mexico.
The 2020's Are Mexico's For The Taking
The next consumer price index (CPI) is set to be released on Thursday.
A number of fundamental forces are coming together today to make Mexico a rising economic power with serious potential.
Although not perfect, Mexico has a number of inherent advantages.
Being so physically close to the United States – instead of on the other side of the Pacific Ocean – is an obvious one.
But there’s a lot more few investors really see right now.
Here are the top three reasons that could turn Mexican into a substantial economic power in the next few years:
Mexico Is Young
The key to economic growth at the individual country level is having a sizeable working age population.
Mexico has it.
57% of the country is under the age of 34.
This is younger than the U.S.where 44% is under 34 and it’s much younger than China where just 41% of its population is under 34.
Mexico is young and rising just and it’s where many of the biggest emerging markets like China were a couple decades ago.
Mexico Stock Market Is Relatively Cheap
Emerging markets stocks are price right for years of market-beating gains ahead.
Mexico is a great example of how cheap emerging markets are right now.
The overall valuation of Mexico’s stock market is far cheaper than the United States.
The Mexican stock market has a P/E ratio of just 14.
The S&P 500, even after a 20% correction, still has a P/E ratio 20.
Mexico looks even cheaper when you consider the state of the respective economies.
The U.S. has been on the verge of a recession for nearly a year. GDP growth is almost nonexistent accounting for inflation.
Mexico, meanwhile, has posted GDP growth of 4.3% over the last year according to CEIC Data. And that growth number also discounts inflation.
Mexico isn’t just cheap, it’s cheap growth. A usually profitable combination.
Mexican Labor Is Now Cheaper Than China
This is the most important of all.
You can offer political stability, business friendliness, and other things.
But what really matters to emerging markets attracting the kind of foreign investment that can propel world-class GDP growth is costs.
That’s the bottom line.
This is where Mexico has become a standout relative to China.
In purely economic terms, China has kind of become a victim of its own success.
A factory worker’s wages in China are now about $6.50 per hour.
The cost of labor in Mexico is only $4.82 per hour.
This makes Mexican labor 25% cheaper.
And that’s on top of reduced transportation costs, a less hostile business climate, etc.
Mexico Is Heating Up
All of these major forces give Mexico the potential to be a long-term high-growth country.
We foresee a major surge in U.S. investment in Mexico as an alternative to China.
For investors though, if Mexico does as well as China did at the start of the century, Mexico is going to be a big opportunity.
If it does, Mexican stocks (and companies heavily invested in Mexico) could provide some big winners in the months and years ahead.
