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emerging markets

Traders work on the floor of the Bolsa Mexicana de Valores, Mexico's stock exchange, in Mexico City, on Oct. 15, 2012.Susana Gonzalez/Bloomberg

Canadians may think of Mexico as a country devastated by violence and drug-related crime. The stock market offers a far more optimistic view.

Mexico's bourse is the second-best performing major market in the world so far this year, lagging only Germany's. The benchmark IPC index has soared 23.6 per cent in U.S.-dollar terms (20 per cent in Canadian-dollar terms), as investors have become increasingly convinced that cartel violence can't derail Mexico's economic growth.

The country's manufacturers are now competitive with low-wage Asian countries. And a series of reforms could unshackle its labour market, leading to even bigger gains for the Mexican economy and for investors.

"This is a market that was dead in the water for a long time," said Scott Piper, portfolio manager of Excel Funds Management Inc.'s Latin America Fund. Now, he said, "we're seeing capital markets expanding, the number of [listed companies] increasing. We think that [the proposed reforms] are structural long-term positives for the market."

Driving Mexico's ascent is a rapidly closing wage gap with China. In 2002, Mexican workers earned more than twice Chinese wages; now, thanks largely to rising Chinese salaries, they earn 14 per cent more, according to a JPMorgan study.

Combined with Mexico's low shipping costs to major markets in the U.S. and Canada, the newly competitive wages are turning Mexican manufacturing into an unsung powerhouse. In 2011, Mexico touted itself as the world's largest exporter of flat-screen television sets and fourth-largest car exporter.

A series of reforms to the country's financial and labour markets has provided further fuel for Mexico's economy. Economists now suggest that it could surge past Brazil to become the fastest-growing economy in Latin America.

President-elect Enrique Peña Nieto's Industrial Revolutionary Party, while without a majority in congress, is working with opposition parties to push through measures that would allow hourly wages instead of daily rates, and loosen rules on hiring and firing. Also on the drawing board are proposals to revamp tax collection for increased revenue and to allow privatization in Mexico's energy sector.

If the reforms are passed, Mexico is well positioned to become Latin America's biggest economy by 2022, according to a Nomura Emerging Markets Research report."We believe that, over time, capital will likely flow much more efficiently to Mexico than Brazil," Benito Berber, Nomura's senior Latin America strategist and co-author of the report, said in an interview.

While many emerging stock markets are dominated by foreign investors, recent reforms have helped create a domestic base of buyers, according to Adam Kutas, who manages Fidelity Investments Canada ULC's Latin America fund. "That's very positive" for the country's investing environment, he said.

The financial market reforms, passed in 2009 and 2010, saw Mexico's first real estate investment trust come to market, and introduced structured equity securities called CKDs that are intended for heavy investments from pension funds.

With more than half of Mexico's population under 25, the country's pension funds are likely to be net buyers of equities for decades to come.

Some fund managers now see the country as a relatively safe bet for global investors who are prepared to be patient.

"Mexico is the natural stop for risk-averse investors if they want to get into emerging markets," says William Landers, senior portfolio manager of BlackRock Inc.'s Latin American equity funds.

The easiest way for Canadian investors to get cheap, broad exposure to the Mexican stock market is through the MSCI Mexico Investable Market Index Fund. The exchange-traded fund, which trades on the New York Stock Exchange, is up nearly 25 per cent year to date.

Mexican wireless giant America Movil is also listed on the NYSE, making up about 10 per cent of Fidelity's Latin America Fund portfolio. "Mexicans are very early adopters of smartphone tech and smartphone use," Mr. Kutas says, particularly because of their young demographic.

Commercial retail is another way into the Mexican stock market, with brands like Wal-Mart de Mexico available to non-Mexican investors. Among Mr. Landers's favourite picks is beverage company Fomento Economico Mexican, or FEMSA, for its growing suite of Oxxo convenience stores.

With property values remaining low in Mexico, XL fund manager Mr. Piper believes real estate is a wise investment. "We think property values will continue to gain over time," he said. Fibra UNO, Mexico's only publicly traded REIT, has gained 35 per cent in value so far in 2012, though it only trades on the Mexican Stock Exchange.