Sell China, Buy Mexico
Every contrarian investor pledges allegiance to the
following creed: Shun whatever the masses love; love
whatever the masses shun.
Whenever an investment idea becomes extremely popular, it
usually becomes extremely unprofitable shortly thereafter.
That’s why innovative investors throughout history have
attempted to devise gauges that indicate moments when
investor sentiment becomes overly optimistic or
pessimistic. We call these contrarian indicators.
Some of these indicators are more amusing than useful.
There are indicators derived from Time magazine covers, and
best-selling books and even Alan Abelson’s columns in
Barron’s. Whatever idea these media venues promote, the
theory goes, are the very idea that a prudent investor
The chatter one hears at investment conferences provides
another particularly useful contrary indicator. While I was
in Vancouver last month for the Agora Wealth Symposium, I
heard a lot of enthusiastic talk about China. It seems that
China was the main thing most investors wanted to talk
about, including my cabbie. China headlines sell. People
flock to hear about investing in China. Could this also be
a warning sign?
It could be. But I am more interested in what people are
NOT talking about. At a conference about global investing,
I heard quite a bit about China and India, and even Brazil.
I also heard a lot of talk about energy and the
dollar…But not one word about Mexico. That’s one reason
I’m attracted to Mexican stocks.
As the nearby chart illustrates, the Mexico Fund has been
performing admirably over the last few years. Yet China
Fund has produced twice the gains. The Mexico Fund has been
closing the gap recently, and I suspect this trend will
continue. For one thing, Mexican stocks are much cheaper
than Chinese stocks. The average price-to-earnings (PE)
ratio of the stocks in the Mexico Fund, for example, is
below 13, while the average PE of the China Fund’s holdings
is above 20.
The Mexican bolsa offers a number of world-class
investments opportunities that are selling for very low
valuations. I recently recommended two such stocks to my
Fleet Street subscribers. Grupo Aeroportuario del Sureste
(NYSE:ASR), the Mexican airport operator is up 42% since my
recommendation last November, while Industrias Bachoco
(NYSE:IBA) has advanced 23% since April. In both cases,
subscribers were able to pick up debt-free companies with
lots of cash trading at very cheap valuations.
Some of the perceptions about Mexico stubbornly limit its
appeal. Most people seem to have a relatively low opinion
of the place. Violence, corruption, poverty, illegal
immigrants and ill will about NAFTA – these are the
thoughts of most people I’ve talked to about Mexico.
On the plane back from Vancouver, I read a new book
entitled Dictionary Days, by Mexican-born author Ilan
Stavans, now an American citizen. There is a passage in the
book where he ruminates on a day spent revisiting his
native land. He writes about attending a play and seeing a
poor Indian woman sitting on the floor outside. Dressed in
traditional embroidered regalia, the woman had long,
unkempt hair and a bronze, wrinkled face. Around her was a
colorful display of merchandise for sale: Mayan folklore
dolls, sweet-and-spicy candy, Chiclets, Japanese peanuts
and other assorted souvenirs and gifts.
The woman serves as a reminder, Stavans writes, that
"Mexico’s modernity is still unfinished business…although
the government lavishly promotes the idea that, as Octavio
Paz put it once, ‘Mexico has finally joined the banquet of
Western civilization,’ the truth is otherwise: A large
portion of the population still cannot spell the word yo."
So I am not denying that Mexico is still a largely poor
country with its share of emerging-market pains. But at a
certain price, it becomes worth the risk. I would argue
that if you do the micro work well, the macro stuff become
less important (think of micro as the gritty details of
companies and specific investments, and macro as the bigger
picture of industries and economies). Cheap valuations, or
a margin of safety, will pull you through a lot of
adversity, like a sled dog though the Iditarod.
Interestingly enough, I came upon an old lecture delivered
by historian Lord Acton (author of the maxim "Power tends
to corrupt, and absolute power tends to corrupt
absolutely"), in 1868, entitled "The Rise and Fall of the
Mexican Empire." Here is a snippet, which is intriguing
because of its essential timelessness:
"The scene of the tragedy which I will attempt to describe
is a country on which Nature’s fairest gifts have been
lavished with an unsparing hand, but where man has done his
utmost to thwart the designs of Providence…
"Mexico possesses a territory more than thrice as large as
France, with the fertility of the tropics, and the climate
of the temperate zone, seated between two oceans, in the
future center of the commerce of the world. Its wealth in
precious metals is so enormous that the time will come when
the market will be flooded with silver, and its price will
not allow the mines to be worked with profit."
Certain lands and places always seem to capture the
imagination. Investors’ favorites just seem to rotate
around — Brazil, India and Russia, to name a few — have
all had some time in the limelight in recent years. But it
is often better to fish around where there are fewer
fishermen. In other words, look at markets that are not now
in the headlines.
In my previous newsletter, Capital & Crisis, I wrote a
bullish profile of Japan in early 2004 and made a pair of
recommendations on that theme. Japan’s shares have recently
hit four-year highs – despite a drumbeat of worry and
negativity about deflation, demographics, debts and other
woes. Again, at a certain price, Japanese stocks become
China is a hot story, no doubt, and the emergence of China
is having a dramatic impact on the patterns of global
trade. Yet investors would probably do better to resist
buying China’s too-popular stocks and to scout around for
undiscovered opportunities just below the border.
WTI NYMEX CRUDE