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Mexico Stocks Are Surging This Year On Reshoring Bets, But Big Risks Can Knock Down The Rally

Mexico stocks are surging this year on reshoring bets, but big risks can knock down the rally

Mexico stocks are surging this year on reshoring bets, but big risks can knock down the rally

The Mexico nearshoring play is real, but investors should be aware of some pitfalls. Nearshoring, also called reshoring, onshoring, inshoring or backshoring , is helping drive Mexican stocks higher this year. The iShares MSCI Mexico ETF (EWW) is up more than 25%, higher than the S & P 500, which is 15% higher, and the iShares MSCI Emerging Markets ETF, ahead just 4%. EWW YTD mountain IShares MSCI Mexico ETF year-to-date. For U.S. companies, there are compelling advantages to moving operations to Mexico from Asia, including geographical proximity, as well as low labor costs. But some market participants urge caution for investors, saying there are challenges. President Andrés Manuel López Obrador’s seizure of a railroad run by conglomerate Grupo México earlier this year made some investors wary. Several issues still need to be addressed by the Mexican government, they say. “Nearshoring is real. It is a contributor to GDP at this point, particularly in the north of Mexico, where you’re seeing above-average growth relative to the rest of Mexico,” said Meagan Nace , analyst on the Artisan Partners Sustainable Emerging Markets Team. Nace took a trip to the country in November. But some threats “really call into question how long this rate of growth in nearshoring can go,” Nace added. Here are three issues investors need to consider. Access to power The “number one risk” threatening the nearshoring narrative is electricity, according to a June note from Morgan Stanley’s Mexico equity strategist Nikolaj Lippmann. The lack of stable, reliable sources of power is an issue for American companies seeking to bring operations closer to home. “There is no nearshoring industrial revolution without electricity,” according to a March note where Lippmann discusses Mexico’s need to revamp its electricity infrastructure. “Mexico’s industrial North and Baja California are already struggling, and the country risks facing a power deficit in 2025 … if no capacity additions are done in the coming years,” Lippman said. That potential deficit is leading “some companies to question the return on investment of moving the entire supply chain when there’s no incentive to build renewable energy in your country, and you may not have access to the grid,” Nace said. The need for ‘secondary cities’ Companies seeking to reshore their operations in Mexico are scouting for space in the northern part of the country, close to the border of the United States. Monterrey , the city chosen for a Tesla plant , is one such industrial hub. However, Artisan Partners’ Nace said much of the region is completely built out, unlike southern Mexico, which is usually a destination for tourists. That makes it difficult for companies to establish a base of operations. “There is no room for any other buildings unless you start looking for these secondary cities,” Nace said. She added that she has heard anecdotally that finding labor is also an issue in northern Mexico, as workers are wary of living in the region. “You think it’s this booming area, and it is, and it’s filled to capacity … no one really wants to live there,” she said. Water scarcity Access to water is also an issue for companies in Mexico. In fact, President López Obrador previously barred facilities in the Nuevo Leon area, home to Monterrey, because of water shortages. He said Tesla offered to use recycled water at its plant. Companies have committed “that all the water used in the manufacture of electric automobiles will be recycled water,” López Obrador said. Automakers are not the only water-intensive industries. Semiconductor manufacturers, which are also seeking to reshore operations, also require vast amounts of water. “This is an area that really Mexico has not dealt with,” Nace said. Nace, while acknowledging the stock market in Mexico remains shallow “and quite narrow,” has found less obvious stock picks for investors. Industrial real estate firm Vesta Mexico , which recently debuted on the New York Stock Exchange, is a beneficiary of the nearshoring trend, has multinational operations and superior corporate governance, she said. Another pick is auto insurance company Qualitas Controladora SAB de CV, which Nace called a less well-known opportunity. According to Nace, the firm is the largest auto insurance company in Mexico, “similar to a Progressive in the United States. Significantly, it offers a cross-border trucking program and is poised to gain market share. “Many times, the U.S. companies are uncomfortable insuring their fleet within Mexico, but the reality is, the Mexican truck drivers would rather call Mexican companies,” she said, “so, there is a benefit […]

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Daisie Hobson

Daisie Hobson is a Director at the Reshoring Institute and an engineer with many years of experience in manufacturing and project management.

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