Make no mistake: Last Sunday's Mexican election, which unseated 71 years of government, is good news for Mexican democracy, the Mexican economy and investors looking to buy into the country. There is little downside.
Stocks in Mexico have risen 5% since the election. The poll results, which put the nationalist
Institutional Revolutionary Party
out of office and the pro-free market
National Action Party
in power, set the stage for a strong rally in the next few months.
Here's why. To begin, many investors have been holding back on putting money into Mexico, waiting to see if the
curse, the economic crisis that has followed every presidential election since 1976, would reappear. That's too bad because they've missed a rise in the benchmark
, which has tracked the revival of U.S. markets since late May. With the economy in good shape, however, the biggest threat of the curse reappearing was that of a self-fulfilling prophecy caused by investors themselves. Going into the election, investors worried that
ruling party would win a narrow victory amid charges of voter fraud and that could trigger weeks or months of political turmoil.
Instead, the actual results surpassed even the most hopeful expectations. Challenger
posted an overwhelming victory. Only a few minor voting irregularities reported. Labistada graciously conceded power, and perhaps even more importantly, Fox accepted victory graciously, with wholesale purges of the government now expected. Despite a long, five-month transition before Fox officially takes power, political risk in Mexico is now significantly reduced.
In addition, Mexico now faces the strong likelihood that ratings firm
Standard & Poor's
will boost the nation's credit rating to investment grade, a move that will bring institutional investors, many of whom are prohibited from investing in countries with sub-investment grade ratings, back to the country. In March, fellow ratings firm
Moody's Investors Service
raised its rating to investment grade and investors have been eagerly anticipating a move by S&P ever since. S&P does not link a rating upgrade directly to the election, but a calm political environment should help seal one by the fourth quarter.
Finally, of course, there is what Fox, the former head of
Mexico operations, will do as president. While both candidates had similar economic policies and the ruling PRI had long ago abandoned its socialist roots, Fox's PAN is generally more pro-free market. Already, he has proposed a hemisphere-wide common market.
In short, a stable political environment plus strong economy plus a credit upgrade plus sound policy equals market rally over the next few months.
U.S. investors have numerous Mexican opportunities, including 28 companies listed on the
New York Stock Exchange
, three on the
Nasdaq Composite Index
and several that can be bought over the counter. Renato Grandmont, Latin American strategist for
, recommends stocks such as
, as well as banks
, which are not listed on U.S. exchanges. This week, Grandmont enthusiastically recommended increasing an overweight position for Mexico. His advice may be worth paying attention to, since he is one of the only observers I know of who actually predicted that Vicente Fox would win.
To play the country as a whole, investors have three options: the
iShares MSCI Mexico
, which tracks the
Morgan Stanley Capital International Mexico
, and the closed-end
Mexico Equity and Income Fund
. However, that fund is in a bit of turmoil, as directors have proposed changing its direction. (See Ian McDonald's
piece on the subject.)
Investors can also play Mexico through regional Latin America funds. With the other major economy in the region, Brazil, taking serious steps towards economic reform, those might be the best bets. The best performer in the category is the
Merrill Lynch Latin America with 41% of its assets in Mexico, which is up 5.8% this year. It requires a $1,000 initial investment and carries an expense ratio of 2%. Next best is the
T Rowe Price Latin America Fund, which also has 41% of its assets in Mexico and is up 5.7%. It requires a $2,500 initial investment and carries an expense ratio of 1.62%.
To be sure, not everything in postelection Mexico is completely rosy. PAN has the leading party in the Lower House of Congress but does not have a majority, and PRI controls the Senate, creating the potential for political gridlock. In addition, "the whole administrative apparatus is still held by PRI," says Joyce Chang, the head of fixed-income research at
, who nonetheless believes the election is "very near a best-case scenario." And then there is always the threat of a real slowdown in the U.S.
Those are minor quibbles. The Mexican election is good news for investors who've been waiting for some good news South of the Border for a while.
David Kurapka's Global Portfolio column appears Mondays, Wednesdays and Fridays on TSC. In keeping with TSC's editorial policy, he does not own shares in any companies or mutual funds mentioned in this column. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at