Why I’m buying Mexico and shunning Argentina and Brazil
Fabian Onetti, former Morgan Stanley advisor and current president of Winston Capital Advisors, gives us his take on the past month’s key market events and how he has positioned his portfolio to mitigate their impact and generate returns.
While the S&P 500 is 3.2% up for the year, the Nasdaq 100 is up 12.4% and the Russell 2000 has risen 10.4%. How do we interpret this divergence?
In principle, the stock market continues to be led by technology companies, and not only by ‘new’ firms such as Facebook, Netflix and Apple, but also by ‘old guard’ businesses such as Intel, Microsoft and Cisco, etc.
However, in the traditional Dow Jones Industrial Average, companies such as Boeing, 3M, McDonald’s, Walmart and ExxonMobil have done very little so far this year, many falling victims to the rise of the dollar and fears over President Donald Trump’s trade war.
This divergence is evident when you take a closer look at the Russell 2000. Small and medium companies are less vulnerable to the dollar and tariffs since their business tends to be more domestic and regional with much less exposure to international trade.
Meanwhile, emerging markets continue to suffer, not only in equity but also in fixed income markets, as well being hit by the exchange rates. There seems to be no mercy at hand, with the emerging regions struggling with a deep bear market that does not seem to be finding its floor or any semblance of stability.
However, this creates an opportunity and we’re encouraging our clients to buy Mexican stocks.
On the one hand, the market is showing signs of a technical rebound that at some point had to happen. On the other, we are betting that president-elect Andrés Manuel López Obrador (AMLO) will be a progressive leftist that respects the business world and is not a Hugo Chávez, Nestór Kirchner or Cristina Fernández de Kirchner like some fear.
The first signs have been positive. He met with business leaders to calm their fears over any crazy nationalization or expropriation moves. He also said he does not intend to change the constitution, which now allows private investment in the oil sector.
It is also emblematic that his first telephone call after winning the election was to President Trump. We believe that it is also possible that a Nafta agreement will be reached sooner than anticipated. During his electoral campaign, AMLO spoke of the need to upgrade the more than two decades old agreement, especially in regard to greater rights for Mexican workers.
Hold off on Brazil and Argentina
Last month I spent two weeks in Latin America where I visited São Paulo, Rio de Janeiro, Montevideo, Buenos Aires and Santiago de Chile. This helped me get a much better idea of where those emerging markets are heading.
When it comes to Argentina and Brazil, we are less enthusiastic, as we do not see a catalyst that will help drive these markets.
In Brazil, economic data on the full impact of the truckers’ strike is starting to appear, and the truth is quite shocking. The graphic below shows that Brazil’s industrial production in July suffered its biggest drop since the financial crisis.
The presidential election is approaching and candidates are still far from forming a clear campaign rhetoric. We also saw this past weekend that former president Luiz Inácio Lula da Silva is not out of the equation as ongoing legal wrangling could see him released from prison.
All of this does not invite investment, aside from seizing upon a technical market rebound or going for cheap assets and willing to be patient. The central bank has no appetite to use its reserves or other instruments to strengthen the Brazilian real and, with the economic slowdown and very low inflation, it’s not too worried about the rise of the dollar.
Meanwhile, in Argentina, poor management of the economic situation has put President Mauricio Macri’s plans on hold.
A new peso low, accelerating inflation and a fall of the economic activity have created an almost explosive cocktail. Even with the vote of confidence from MSCI plus the reinforcements of the International Monetary Fund, President Macri’s team can’t stabilize the situation.
The stock market, although small, is very volatile. It also gives us the impression that foreign funds have liquidated some positions and there is very little capacity for the local market to absorb those sales. It has been a long time since we suggested to sell all positions there and for the moment we do not see a reason to re-enter.
Moving onto Chile, at the beginning of the year we recommended to buy and the market was up for a while after the election of Sebastián Piñera. It is now down -12.2% for the year.
Among other things, it fell victim to the great fall of copper, which went below $3/lb, drops in other metals and grains, and fears China may be experiencing another bout of deceleration.
We continue to own the large S&P 500 market with a strong emphasis on a number of shares. Our other investments in energy, despite the crude oil rally, and financials have not performed very well. The stress tests, lower regulation and higher short rates have not helped achieve anything for financials so far this year.