Author:
Brian S. Freiwald, CFA | Portfolio Manager
Reshoring and nearshoring are key trends for investors in global markets. As geopolitical tensions escalate and more businesses shift operations away from China, investors are considering the impacts of deglobalization. For many businesses and regions, we believe it could drive meaningful growth, with Mexico as one of the biggest beneficiaries.
In our view, Mexico stands to benefit from both reshoring — businesses moving their manufacturing back to their domestic markets, and nearshoring — businesses moving manufacturing to regions that are closer to their headquarters.
Executives are planning to increase investments in Mexico
Nearshoring to Mexico is still in its early phases, but we continue to see positive developments beyond already announced investment and expansion plans. In a survey of companies operating in Mexico, the Central Bank of Mexico found that a significant percentage of corporate executives are planning increased levels of investment. This includes expanding production, hiring more staff, and renting more real estate as a result of nearshoring opportunities.
The impact of nearshoring on business plans
Corporate executives in Mexico surveyed on impact (% who responded affirmatively)
Source: Banco de Mexico, with data from the Programme of Surveys to Corporate Executives.
Observations from our research
Through our travel, meetings, and research, we have observed nearshoring trends and their potential to drive further economic growth in Mexico.
- On our recent trip to Taiwan, we confirmed that Taiwanese companies — ranging from AI server assemblers to even curtain makers — have a strong desire to accelerate their expansion plans in Mexico.
- Conversations with IT services companies from India, Latin America, and the U.S. confirm incremental investments toward nearshore capabilities, as proximity, better time zone compatibility, and skilled talent bases drive client demand.
- One of the largest freight forwarders told us it is seeing a big increase in demand from clients to use Mexico as a final assembly base.
Mexico outpaces China in exports to the U.S.
Mexico is experiencing a surge in exports due in large part to nearshoring trends. In early 2023, for the first time in decades, Mexico overtook China as a source of exports to the U.S.
Mexico overtakes China as leading exporter to the United States
Source: JP Morgan.
As a result of nearshoring trends, minimum wage hikes in Mexico have been consistent, with an additional increase of 15% to 20% expected in 2024. Although this can put pressure on corporate profits, it bolsters the spending power of consumers. Also, inflation in Mexico is moderating from elevated levels. Benchmark rates have likely peaked, but Banxico, Mexico’s central bank, has indicated a cut is not likely any time soon, as inflation is still above its target range.
Year to date, Mexico has been one of the best-performing markets in the world, due in part to the strong appreciation of the Mexican peso. We believe there is room for further outperformance, driven by upward earnings estimate revisions and compelling valuations.
Positive outlook for EM equities overall
While we are bullish on Mexico’s economic outlook and growth potential driven by nearshoring, we are also bullish in our outlook for emerging market stocks overall. In addition to Mexico, we are particularly focused on opportunities in India and Indonesia, which are also beneficiaries as businesses look to expand operations outside of China. We believe stock prices follow earnings over the long run. Therefore, EM stocks may be poised for compelling growth, especially over the next three to five years.
This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon as research or investment advice regarding any strategy or security in particular. Any mention of specific securities is intended to help illustrate Putnam's research process and should not be considered a recommendation or solicitation to purchase or sell the securities. Potential market trends and opportunities were selected without regard to whether such trends and opportunities, or relevant securities, were profitable and are intended to help illustrate our investment and research process. It should not be assumed that any investment in these securities was, or will prove to be, profitable, or that the investment decisions we make in the future will be profitable or equal to the investment performance of securities referenced herein. There is no assurance that any securities referenced herein are currently held in a Putnam portfolio or that securities sold have not been repurchased. Any securities mentioned are not necessarily held by Putnam for all client portfolios.
This material is prepared for use by institutional investors and investment professionals and is provided for limited purposes. This material is a general communication being provided for informational and educational purposes only. It is not designed to be investment advice or a recommendation of any specific investment product, strategy, or decision, and is not intended to suggest taking or refraining from any course of action. The opinions expressed in this material represent the current, good-faith views of the author(s) at the time of publication. The views are provided for informational purposes only and are subject to change. This material does not take into account any investor's particular investment objectives, strategies, tax status, or investment horizon. Investors should consult a financial advisor for advice suited to their individual financial needs. Putnam Investments cannot guarantee the accuracy or completeness of any statements or data contained in the material. Predictions, opinions, and other information contained in this material are subject to change. Any forward-looking statements speak only as of the date they are made, and Putnam assumes no duty to update them. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties. Actual results could differ materially from those anticipated. Past performance is not a guarantee of future results. As with any investment, there is a potential for profit as well as the possibility of loss.
This material or any portion hereof may not be reprinted, sold, or redistributed in whole or in part without the express written consent of Putnam Investments. The information provided relates to Putnam Investments and its affiliates, which include The Putnam Advisory Company, LLC and Putnam Investments Limited®.
Putnam Equity Insights reflect the views of the senior investment leaders supported by the fundamental insights of Putnam's global equity research analysts. Predictions, opinions, and other information contained in this article are subject to change. Any forward-looking statements speak only as of the date they are made, and Putnam assumes no duty to update them. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties. Actual results could differ materially from those anticipated.
Putnam Retail Management, LP and Putnam Investments are Franklin Templeton companies.