The Emerging Markets boom has been driven mostly by easy money and commodity exports. As the Federal Reserve continues to retreat its massive bond-buying programme, and China shows signs of a slowdown, Emerging Markets are taking a hit. We’ve seen their currencies depreciate dramatically and their stock markets plunge. The latest Markit/HSBC PMI fell to 48.3 in February, causing quite a bit of wobbles in the markets.
As the commodity export driven boom dies down, it could be a good idea to turn our attention to consumer driven stories, such as Mexico.
Mexico is very much tied up with the economy of the United States. There are trade agreements and cooperation in place, and more than 75% of Mexico’s exports go to the US. In some industries, there is joint production and supply chains infrastructure in place. As the growth outlook improves for US, this should be good news for Mexico.
Moody’s has recognized Mexico as investment grade (A-). Pena Nieto, Mexico’s president has included in his reform agenda energy, communications and competition policy, labour market and legislature etc. If reforms are fully implemented, especially in Mexico’s closed energy sector, the outlook on the Mexican economy will dramatically ameliorate. Also, giants like Cisco, Nestlé and PepsiCo have announced plans to spend $1.3bn, $1bn and $5.3bn respectively.
The fundamental point here is to recognize that the basket of emerging markets is composed of entirely different animals. Even though Mexico has not been suffering the typical withdrawal symptoms that other EM countries have because of the FED tapering, it is still in our opinion being penalized just because it is part of this quite unnatural umbrella called ‘Emerging Markets’. We suggest therefore getting an exposure to Mexico by going long EWW (iShares MSCI MExico ETF – 0.48% expense ratio).
*At the Davos conference, Mexico was identified by the participants as the winner for Emerging Markets
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