Mexico Trumps China In EM Pecking Order

It’s time to turn our backs on China and embrace Mexico by replacing any exposure to the former in your emerging market (EM) portfolio with positions tied to the latter.

The EM sector has been a challenging investment proposition from a risk/reward perspective lately. In fact, this summer was downright scary!

In August, the MSCI benchmark collapsed by 9%, fueling fears that investors were in the midst of a mass EM liquidation. The result was a ripple effect throughout global financial markets and a rapid rise in volatility.

The rising volatility was also fueled, to a large extent, by the strength in the U.S. dollar over the past 15 months. This contributed to the confusion in EM markets.

The Fed’s decision to hold rates was determined largely by the weakness in data coming out of China and other emerging markets.

Investors are increasingly concerned about the growing vulnerabilities in emerging market economies, particularly China, as they reassess the global growth outlook. China’s equity markets plunged in June and early July, fracturing investor confidence and weighing on asset prices worldwide.

Emerging markets typically invite volatility to your portfolio, more so than usual now.

So what else looks good in the EM world and offers return opportunities with less volatility? Mexico.

More Competitive Mexico

Let’s compare currencies to start. The Chinese renminbi has appreciated approximately 50% against the Mexican peso over the last decade. Just look at how the value of one Chinese renminbi per one Mexican peso has dropped over this past year.

This means that, on a dollar-equivalent basis, if you want to import into the United States, Mexico is far more competitive than China.

The State of Foreign Trade

From a foreign trade standpoint, Mexico’s association in NAFTA (North American Free Trade Agreement) is a big advantage compared to China. This means goods exchanged between the United States and Mexico aren’t subject to the myriad barriers and tariffs imposed on goods flowing to and from China.