By Myra P. Saefong, MarketWatch
SAN FRANCISCO (MarketWatch) — Investors looking for direction from the U.S. stock market may want to gaze north and south — to Canada and Mexico — for cheaper and better opportunities.
As two of the three top U.S. trading partners other than China, Canada and Mexico stand to benefit from a U.S. economic recovery as well as their own.
But Canada’s resource-heavy market and corruption and violence in Mexico are major risks.
Wal-Mart’s risk in Mexico bribe probe
Paul Vigna and Stephen Wisnefski talk to Miguel Bustillo about the legal risks Wal-Mart faces over bribery allegations in Mexico, and Charles Forelle discusses the collapse of the Dutch government as budget talks fail. Photo: Reuters.
“Both Canada and Mexico represent opportunity and peril,” said Scott Barclay, a financial writer and editor of e-newsletter The Investing Opinion.
“An investor needs to be confident that oil will rise in price to consider Canada a good investment,” he said. “Mexico is actually more diverse. However, government corruption presents headline risk.”
Nonetheless, some analysts tout the merits of these two neighbors for patient investors.
“Economic growth is expected to be a little stronger here in the U.S. than in Canada over the next couple of years,” said Nicholas Kaiser, manager of Sextant International Fund /zigman2/quotes/202666830/realtime SSIFX +1.11% . But “with 70% of Canadian exports hitting U.S. markets, it bodes well for Canadian industry.”
/zigman2/quotes/210597945/delayed IPC 50,268.45, +27.94, +0.06%
Mexico’s economy, “closely tied to the outlook for the U.S. and Mexican growth, looks to be improving with industrial, trade and consumer activity benefitting from the recent improvement in growth in the U.S.,” said Allan Conway, head of emerging market equities at Schroders PLC. U.S. GDP grew 1.7% in 2011 over 2010, which in turn saw growth of 3% from the previous year.
Last year, the economies of Mexico and Canada both grew faster than the U.S.
Mexico GDP growth was 3.9% in 2011, though the nation’s central bank expects to see 3% growth this year. At an annualized rate, real GDP in Canada expanded 1.8% in the fourth quarter of last year, and the Bank of Canada forecasts growth of 2.4% for this year.
Mexico’s risks, rewards
In Mexico, investors will need to weigh opportunity tied to the U.S., the country’s top trading partner, against risks associated with ongoing corruption and violence — most recently bribery allegations involving Wal-Mart de Mexico, , the largest foreign unit of Wal-Mart Stores Inc. /zigman2/quotes/207374728/composite WMT +0.82% Read more on Wal-Mart de Mexico.
“Political risk, corruption and drug-related violence is a big concern for the Mexican economy and the stock market,” said Moe Ansari of Compak Asset Management in Newport Beach, Calif.
At the same time, he added, these risks “are priced into equity prices in terms of lower GDP and [earnings-per-share] growth that could be achieved in Mexico.”
A presidential election slated for July adds uncertainty to Mexico’s outlook.
The nation has “strong potential for upside depending on the capability and willingness of the next government to implement much-needed structural reforms that would improve the competitiveness of the national economy,” said Clinton Carter, associate vice president for Latin America, and Antonio Martinez, Latin America analyst, at Frontier Strategy Group.