Why I’m sticking with Mexico and buying Brazil
In October, I recommended it was time to start dipping your toesback in the market, especially in emerging markets (EM), given that it seemed that some of the volatility had subsided.
We were right about that point, as EMs took the turbulence of the US market rather well and some markets even outperformed. Our thesis was that EMs were many standard deviations cheaper when compared with developed markets, mostly in the fixed income and FX arenas.
We were vindicated as the Argentine peso beat the dollar in October, as did the Brazilian real and the Turkish lira. Their equity markets also did better than the S&P 500.
However, not everything was so rosy.
Let’s start with the US market, which suffered some severe turbulence over the past month. It all started when the yield on 10-year Treasuries hit 3.25%. With money being more expensive, a Federal Reserve raising rates as if on automatic pilot, and the end of quantitative easing, the market finally sent the message that the punch bowl was being taken away.
While not as severe as the February correction, the October drop was especially hard on some of the indices’ leading names of the year: Netflix, Amazon, Facebook and others. Unfortunately, these are names that we like a lot at Winston Capital.
A big market rotation added to our pain as investors sought refuge in value and consumer staples stocks, which we don’t happen to own. The market has stabilized somewhat, especially after Apple’s good earnings report acted like a trillion-dollar bellwether for the market.
From here on hopefully the market’s wounds will heal and it will limp slowly towards a better place.
According to some sources, the US midterm elections were the best for an incumbent president in modern history, as the Republican Party lost a small number of seats in the House of Representatives and gained some in the Senate.
In any case, the market loves a gridlock and it is never good for the executive branch to have too much power – they end up having crazy ideas!
With a moving average of around 2,770 the S&P 500 actually did pretty well during the latest bout of turbulence and the US market seems a little more stable now.
Now to tackle the elephant in the room – China and its trade surplus with the US. We believe the China issue will be resolved but, in our view, the real outstanding issue is whether Western companies will soon gain unrestricted access to the Chinese market, just like it was with Japan in the 1980s.
Returning to emerging markets, things are progressing nicely. The elections in Brazil, the lack of bad news regarding Argentina or Turkey, and hopes for a resolution of the US/China trade disputes have reenergized markets around the world. Most FX has recovered against the dollar and some equities posted double-digit returns.
After recommending returning to the emerging markets last month, particularly Mexican equities, we spent a few sleepless nights as it was a volatile time. However, we still like that play and now we would like add more to Brazil via its equity and FX markets.
President Jair Bolsonaro could be a welcome surprise if he pushes for structural changes. Some Wall Street firms are warming up to him.