Global Equity Strategy
China and Mexico: Parallel Lines Never Meet
EQUITY STRATEGY GLOBAL
Mexico I P C pr ice t o ea r ni ngs
Source: FactSet, Jefferies
Mexico R E E R vs. Ch ina R E E R ( 1994=100)
Source: FactSet, Jefferies
8
10
12
14
16
18
20
02 03 04 05 06 07 08 09 10 11 12 13
40
90
140
190
94 96 98 00 02 04 06 08 10 12
Mexico China
Sean Darby *
Chief Global Equity Strategist
+852 3743 8073 sdarby@jefferies.com
Kenneth Chan *
Quantitative Strategist
+852 3743 8079 kenneth.chan@jefferies.com
Angela Cheung, CFA *
Equity Associate
+852-3743-8078 angela.cheung@jefferies.com
* Jefferies Hong Kong Limited
Key Takeaway
Mexico's equity market has been an outstanding performer helped by FX
inflows on the back of the carry trade and solid economic performance.
However, there has been some noticeable loss of momentum recently although
the economy is easily outperforming its peers as well as China. Also investors
should be aware that the balance of payments has become much more
dependent on hot money inflows.
Mexico’s GDP is correlated very closely with the US (approximately 0.9) and is the mostly
closely leveraged emerging market to improvements in US growth. Mexico appears to have
clawed back from China a share of the exports to the US over the past three years. It seems
that higher labour costs in China and higher value added exports from Mexico have led
to the increase in market share. Interestingly, a similar pattern of weaker exports has been
recorded at recent export trade fairs in China and may mean that utilization of mainland
ports may not necessarily grow in line with global trade.
In the short term the Mexican equity market appears overbought and susceptible to a
correction if the US carry trade were to reverse. The catalyst could come from a rise in US
treasuries as the N. American economy improves since this would interrupt capital flows into
Mexico. The market’s lofty valuations would also mean the correction could be quite sharp
despite the underlying strength in the economy. Market volatility aside, investors ought to
have some exposure to the economy given its relative competitiveness versus China and
ongoing business and consumer expenditure cycles. We remain Bullish on Mexico (EWW
US, iShare MSCI Mexico Investable Market Index Fund).