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Investors have looked to emerging markets for more than a decade as an alternative to the low growth rates that have held back much of the developed world. But not all emerging markets are the same, and different markets have to follow their own paths in charting a course for greater prosperity. Changing conditions among markets require that you pay attention to make sure the return potential is in line with risk levels.

One area where emerging-market investors have focused lately is Latin America. For a long time, Brazil has been the giant of the Latin American economy, with a rising middle class, vast wealth in natural resources, and an appetite for growth. But lately, investors have shifted their focus northward to Mexico, and interest in the Mexican stock market has risen to frothy levels.

Why Mexico has gotten more popular
U.S. investors know quite well how much impact a presidential election can have on the markets, and things are no different with our neighbor to the south. Last July, Mexican President Enrique Pena Nieto got elected, taking office in December and replacing former President Felipe Calderon. As Fool contributor Michael B. Lewis noted shortly before Pena Nieto took office, the change in government offered a much different relationship between the U.S. and Mexico, with less of an emphasis on the negative aspects of drug trafficking and violence and more on free trade and attracting direct foreign investment.

The impact has been huge. Consumer stocks have performed strongly as conditions have improved, resulting in a big move up for beverage maker Fomento Economico Mexicano . Meanwhile, improving prospects for construction have helped pull up shares of cement manufacturer Cemex .

As a result, money has flooded into the Mexican stock market, and as The Wall Street Journal reported yesterday, exchange-traded funds covering Mexico have attracted huge amounts of cash. The iShares MSCI Mexico ETF has brought in $1.4 billion during the past year, while the corresponding iShares MSCI Brazil ETF has had outflows of roughly $236 million over the same period.

Why paying a premium for Mexico isn’t smart
There’s evidence that investors are paying too much to get into the Mexican market. The closed-end Mexico Fund has historically had its shares trade at a substantial discount to their net asset value, with discounts approaching 30% during the 2000-2002 bear market and 20% during the financial crisis. In simple terms, selling shareholders in the funds were willing to accept $0.70 to $0.80 on the dollar in order to cash out.

But now, those same closed-end fund shares trade at a 10% premium to net asset value. Mexico Fund’s holdings aren’t identical to those of the iShares Mexico ETF, whose shares trade in line with the value of its assets, but the two lists of holdings have a lot of similarities.

Investors are also attracted to Mexico Fund’s managed distribution policy, which ensures a much higher …read more
Source: FULL ARTICLE at DailyFinance

By Dan Caplinger, The Motley Fool

Filed under: Investing

The pace of the economic recovery in the U.S. has been disappointing at best, leaving millions of Americans unemployed and making many people wonder whether the nation’s best times are behind it. As a result, many investors have looked abroad to faster-growing emerging markets as having better prospects for rising profits.

Latin America has long played second fiddle to red-hot Asian growth markets like China and India. But even though its growth rates have been somewhat more modest lately, Latin American markets have still outpaced their counterparts to the north, and they’re taking steps to accelerate their growth in the years to come. Let’s take a look at three smart ways to cash in on potential future success in Latin America.

The giant: Brazil
Brazil is the largest country in Latin America both by population and by area, and that gives it a wealth of both human and natural resources to use in generating growth. Growth has slowed recently as the country has had to deal with fairly high inflation and an influx of currency speculation that drove up the value of the Brazilian real compared to the U.S. dollar and other major currencies. But GDP growth is expected to rise to 3.5% in 2013, well above the 2% rise in U.S. GDP. The 2014 World Cup and 2016 Summer Olympics will both play out on the Brazilian stage, and the country has therefore had to respond with massive construction and infrastructure spending in order to prepare. That has helped keep unemployment down to a very respectable 5.4%.

Investors can buy the iShares MSCI Brazil ETF as a quick way to get exposure across the spectrum of Brazilian companies, with a heavy emphasis on financial and natural-resources stocks. Those who prefer more emphasis on consumer-facing companies, which arguably have more upside as Brazil‘s middle class continues to rise in prominence, would likely prefer Market Vectors Brazil Small-Cap , which invests in smaller companies and has nearly half its assets in consumer stocks.

The country next door: Mexico
Mexico has a mixed reputation among U.S. investors, many of whom see the country as a source of cheap labor for U.S. multinationals. But the Mexican economy has been booming in its own right, with better than 3% growth in GDP recently expected to rise above 5% throughout 2013. Inflation below 4% is a bonus, and low unemployment of 5.3% compares quite favorably to U.S. labor markets.

Traditional ETFs tend to give disproportionate weight to mobile-telecom giant America Movil because of its massive market capitalization. But one intriguing play on the economy is the closed-end Mexico Fund , which has only half the weighting to America Movil as the country’s MSCI index while emphasizing consumer stocks to an even greater extent. Right now, Mexico Fund‘s nearly 10% premium to net asset value makes it an unattractive buy despite its managed-distribution policy that provides a regular yield of more than …read more
Source: FULL ARTICLE at DailyFinance

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