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For Canadian investors, the knee-jerk reaction when the loonie falls against the U.S. dollar is to buy domestic exporting stocks. But the postcrisis rise of Mexico as an exporting powerhouse means this time, an export-heavy investment strategy may disappoint.

Ford Motor Co.'s apparent decision to earmark $2-billion in investment for Mexico rather than Windsor, Ont., is only the latest sign of declining competitiveness for domestic manufacturers. The chart below shows that the Mexican economy has been the main beneficiary.

SOURCE: Scott Barlow/Bloomberg

As recently as September, 2005, the value of Canadian exports to the United States was 80-per-cent higher than U.S. imports from Mexico. Everything, however, changed during the financial crisis. Between July, 2008, and May, 2009, Canadian exports declined 48 per cent. Mexico's exports fell a much smaller 21 per cent.

Since then, Canada's exports to the U.S. have not recovered to precrisis levels, whereas Mexico's exports are now 25-per-cent higher than their precrisis peak.

There are 34 members of the S&P/TSX composite index with more than 35 per cent of revenues generated in the United States, according to Bloomberg data. For some, like forestry stocks Interfor Corp. and West Fraser Timber, there is little competition from Mexico and the weaker Canadian dollar will help boost earnings. Financially-based companies on the list, like Brookfield Asset Management and Manulife Financial, similarly have little to worry about from Mexican rivals.

But the outlook is much less clear for domestic companies with both direct and peripheral links to manufacturing and exports. Companies such as Magna International and ATS Automation Tooling Systems may not reap the same profit-related rewards from the weaker Canadian dollar as in times past.

At this point, Canadian investors should recognize that the U.S. dollar is also stronger against the Mexican peso. Perhaps more worrisome, California, Texas, Arizona and Florida are among the fastest-growing economies in the U.S. Logistically, imports from Mexico make more sense for these populous southern states than the long haul from the Ambassador Bridge.

A weaker loonie is definitely good news for Canadian exporters, but investors will have to be much more careful with stock selection. Making sure a company doesn't compete with Mexican manufacturers is becoming job number one.

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