It’s no surprise that Mexico’s economy is tied to the US; 36.9% of Mexico’s GDP is export activity, and 73.9% of Mexico’s exports went directly to the US in 2016 (latest data available).
Given that US Industrial Production grew 4.1% in 2018, many would have expected Mexico to also post strong growth. Foreign investors certainly expected good things: Foreign Direct Investment into Mexico during the first half of 2018 rose 18.0% from the first half of 2017.
Despite optimistic expectations, Mexico Industrial Production only grew 0.2% in 2018 and actually started contracting during the last two months of the year. It appears that foreign investors quickly caught on to the negative trends, as Foreign Direct Investment dropped 23.2% during the last quarter of 2018.
Fear and uncertainty play a large part in investments. It took until November 2018 for the United States-Mexico-Canada Agreement (USMCA) to be signed, and it still awaits ratification by all three nations. The unknowns are keeping many businesses from feeling confident about moving forward. With transportation – particularly, cars – being the largest export industry from Mexico, hesitation toward investment is not surprising given all the discussion around automobile and steel tariffs.
Many leading indicators are clearly indicating that the downside is not over for Mexico. We expect that Mexico Industrial Production will contract for the majority of this year.
If you are going to invest in Mexico, you need to do so with your timelines and specific markets in mind. We often encourage our clients to make investments during the bottom of a cycle. That is when your team will have ample time to devote to the endeavor, and, furthermore, you can expect lower EBITDA values to impact selling prices in your favor. Keep in mind that while 2019 decline in Mexico Industrial Production generally signals an opportune time for investment, your case may vary significantly, depending on which segment you are targeting in manufacturing, mining, or construction.
With confidence in Mexico’s economy dwindling, now is the time to quickly identify strategic targets and take advantage of other people’s pessimism.