Invest via an ETF in Mexico and Vietnam
By Matthias Baccino, Trade Republic.
On Wall Street today, the ABC acronym is doing the rounds: Anywhere But China. That US investors are ignoring Chinese stocks should come as no surprise as the two superpowers have been diametrically opposed for several years, with a possible mandatory sale of China's TikTok as the sad highlight. Therefore, it does not look like the two bantams will soon fall back into each other's arms. As an investor, you have the opportunity to invest in two countries that benefit from this duel: Mexico and Vietnam. Instead of basing investment choices on sectors, country-based allocation could make a comeback.
Mexico: nearshoring
As China is increasingly viewed with suspicion, nearshoring is making inroads in the West. This means bringing production back closer to home (and to the end customer) so that there is less or no dependence on distributors and suppliers in less friendly countries: in other words, the supply chain becomes more secure and less complex. And for the Americans, who are in the process of reducing their dependence on China, this is neighbouring Mexico.
Geographically, Mexico is in an excellent position as it has a 3145km border with its big neighbour. And on top of that, the country has quite a lot to offer such as rich resources (oil and agricultural products) and cheap labour, allowing for low production costs. In 2022, the US accounted for 56% of all foreign investment and in 2023, US investment gained additional momentum (see below, US investment in Mexico on a monthly basis), thanks in part to Tesla investing USD 5 billion in a new 'gigafactory'. And since mid-2023, even more US money has been flowing to Mexico than to China, and for the first time in living memory. Mexico is the US' main trading partner and 'made in Mexico' is the new 'made in China'.
On top of that, what is produced in Mexico can rely on support measures and subsidies from the US Inflation Reduction Act, making US companies especially from the automotive, battery and semiconductor sectors fall over each other to produce in Mexico. Despite high interest rates, to combat high inflation, and expensive credit, the Mexican economy continues to perform well. By 2024, economic growth is expected to be between 2.5% and 3.5%, a level that Western economies can envy, and the unemployment rate today hovers around 2.5%, virtually full employment. All this is not without consequences as the demand for logistics and semi-industrial real estate in Mexico, especially the northern states, cannot be kept up with, resulting in current tightness and skyrocketing rents. This extra investment is also putting pressure on Mexico's infrastructure, resulting in regular power cuts and water shortages, among other things.
The Mexican stock market is well placed to take advantage of Mexicans' rising living standards. And despite its rise in recent years, at a P/E of 13, it is not particularly expensive. That is certainly the case compared to the MSCI World global equity index dominated by US values. There is certainly room for the equity market in Mexico to grow as it is underutilised as corporate finance while pension funds have yet to discover equities in abundance.
Two ETFs grafted on the MSCI Mexico are available at Trade Republic. The Xtrackers issue consists of 26 securities and its main positions are Grupo Finance Banorte (14.5% of the index), Beer producer Fomento Economico Mexicano (13.1%) and retail chainWalmex (11.3%). The ETF accounts for about 85% of the total market capitalisation in the country. Basic consumer goods has a 38% weighting in the index, a sector that should benefit from the strong labour market and the expected fall in interest rates. Financials account for 18% of MSCI Mexico and the materials sector 17%. MSCI Mexico Capped USD from iShares is less concentrated because being 'Capped' means that the index composition is revisited regularly, limiting the largest positions.
Vietnam: friendly shoring
In addition to nearshoring, there is also talk of friendly shoring, or locating production in a country within its own geopolitical sphere of influence. And while many countries are in line to attract US companies and production, Vietnam can count on a lot of sympathy from its former enemy. US President Biden announced as recently as September 2023 during his visit to the country that the relationship between the two countries has entered a new "strategic" growth phase. He announced a raft of investments in the country including in semiconductors, space and infrastructure.
No wonder Vietnam has since risen to become the 8th most important trading partner of the US. And for Vietnam, the US has been the most important export market since 2019 (see below), while exports to China are on a downward trend. These statistics clearly show where the country's priority lies today although a recent visit to the country by Chinese President Xi shows that the race is not over yet. Quartons, including HSBC , even claim that many new Vietnamese exports are Chinese products that have only been rebranded.
Either way, Vietnam's popularity has not been without consequences as economically the country is doing quite well. In 2023, the economy grew by 5.05%, admittedly slower than the 8% in 2022 but better than initially expected. In Q4 of 2023, growth was as high as 6.7% and exports in the first months of 2024 grew at their strongest rate in more than 2 years, which bodes well for this year as Vietnam is almost entirely dependent on the export market.
The Vietnamese stock market is attractively priced today at 9.2 times expected earnings, well below its 5-year average of 12.1. On top of that, analysts assume that earnings growth at Vietnamese companies will further accelerate this year. According to broker VinaCapital, average earnings growth would exceed 20% by 2024. Add to that macroeconomic and political stability and the possibility that the stock market should get an upgrade (read: be fully included) by index maker FTSE Russell which could boost demand for Vietnamese shares.
The choice to invest in Vietnamese stocks is limited at Trade Republic. The FTSE Vietnam Swap USD is the only ETF on offer. This tracker is a swap-based or synthetic ETF and, in a nutshell, uses derivatives such as swaps to replicate the performance of an underlying index, in this case the FTSE Vietnam index. The reason issuer Xtrackers uses this is because the Vietnam stock market is difficult to access. The counterparty risk of this tracker is spread across three institutions Barclays Bank, Goldman Sachs and HSBC Bank.
In any case, this tracker allows you to closely follow the evolution of the FTSE Vietnam index. This benchmark index consists of 26 stocks but is quite concentrated as the top 10 account for 78% of the total. Industrial group Hoa Phat Group (14.3%), real estate group Vinhomes (9.2%) and banking group Joint Stock Commercial Bank for Foreign Trade of Vietnam (9%) make up the top three.
