Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / How Mexico Is Becoming the EM Manufacturing Powerhouse
Transcript
- Lucas: If you look at the big EM ETFs this week — EEM at around sixty-four sixty-six, VWO at fifty-seven seventy-two — they've been essentially flat. But one country is quietly breaking away from the pack. Luna: Let me guess: Mexico? Lucas: Exactly. The iShares MSCI Mexico ETF, ticker e w w, is at seventy-four forty-one, up about three and a half percent over the past five days while the rest of EM is basically treading water. Luna: That's a pretty notable divergence. What's driving it? Lucas: It's really the nearshoring story coming into its own. We've talked about Vietnam and Thailand as manufacturing alternatives to China, but Mexico might actually be the biggest beneficiary right now. And the data backs it up. Luna: What kind of data? Lucas: Foreign direct investment into Mexico in 2025 hit a record high — over thirty-six billion dollars. And the first quarter of this year saw another ten billion. That's more than what flowed into India in the same period, and India is three times Mexico's population. Luna: Wow. So where is that money going specifically? Lucas: Mostly automotive and electronics. Tesla's massive gigafactory in Nuevo León is a well-known example, but it's not just them. Major auto suppliers like Continental and ZF are expanding plants there. On the electronics side, Foxconn is building server assembly lines in Chihuahua to meet AI demand. Luna: So we're seeing real physical investment, not just financial flows. Lucas: Right. And that's what makes this different from a lot of EM stories that are just about portfolio inflows. This is factories and equipment — real assets that create jobs and export capacity. Luna: What's the catalyst that's accelerating this now? Because Mexico has always been close to the US market. Lucas: The big push is coming from two forces. First, the ongoing trade tensions with China. The yuan weakened to six point seven seven per dollar recently, which should make Chinese exports cheaper, but companies are still diversifying away. They're worried about tariffs and supply chain disruptions. Luna: And the second force? Lucas: The USMCA — the us mexico canada Agreement — gives Mexico a huge advantage over other nearshoring destinations. Goods that meet the rules of origin can enter the US duty-free. That's a massive cost saving compared to importing from Asia. Luna: But doesn't the strong dollar hurt Mexico? The trade-weighted dollar index is at one hundred twenty point one, which is historically high. Lucas: It does hurt Mexican imports, but remember, Mexico's export sector is heavily dollarized. Many of its manufacturing inputs are priced in dollars, and its output is sold in dollars. So the strong dollar actually boosts the peso value of those export revenues. Luna: So a strong dollar isn't necessarily bad for Mexican manufacturers. Lucas: Exactly. And the peso has actually held up relatively well compared to other EM currencies. The central bank has kept rates high, around nine percent, to fight inflation, which attracts carry trade flows. Luna: So for an EM investor, Mexico looks like a relatively safe bet right now? Lucas: I'd say it's more about timing. The nearshoring trend is structural, not cyclical. But valuations matter. The EWW ETF has a price to earnings ratio around fifteen, which is not dirt cheap but reasonable for the growth trajectory. Luna: And it's not just the ETF. There are individual Mexican stocks that are benefiting. Companies like Cemex in construction materials, or Gruma in food processing, are seeing increased demand. Lucas: Right. And that's the other thing — the nearshoring boom is broadening beyond just maquiladora assembly plants. We're seeing higher-value manufacturing, like aerospace and medical devices, moving to Mexico. Luna: I read that Bombardier is expanding its facility in Querétaro for business jet components. Lucas: That's a great example. And it's not just North American companies. European and Asian firms are setting up shop in Mexico to serve the US market. It's essentially a China-plus-one strategy, and Mexico is the plus-one. Luna: So what are the risks? Because there's always a catch. Lucas: The biggest risk is political. Mexico's president has taken some populist moves that worry investors, like changes to the energy sector and judicial reforms. There's also the security situation — cartel violence remains a concern for businesses operating in certain regions. Luna: And then there's the US election cycle. If the next administration decides to renegotiate USMCA or impose tariffs, that could undercut Mexico's advantage. Lucas: Exactly. But for now, the momentum is strong. Mexico's exports to the US surpassed China's in 2024 and the gap is widening. That's a historic shift. Luna: I think for listeners who are looking for a way to play the EM space without the China exposure, Mexico is worth a close look. Lucas: And if this deep dive into the nearshoring story helped clarify the opportunity, that's exactly what we aim for. The way we keep this ad-free is through listener support — you can buy us a coffee at buy me a coffee dot com slash fexingo. It genuinely helps us keep doing these kinds of episodes. Luna: Yeah, we really appreciate that. And it's a small gesture that goes a long way. Lucas: So to wrap up: Mexico is emerging as a manufacturing powerhouse, and the data supports it. It's not without risks, but for investors looking for a tangible EM story tied to real investment, this is one to watch. Luna: And as always, we'll keep tracking the flows and the policy shifts. Thanks for listening.