Mexico’s Market Activity Bounces Back in 2017

Mexico’s currency fell to record lows in November 2016 following the election of President Trump. Fears that foreign investment in Mexico would reach a standstill caused a mass sell of the Mexican peso. However, contrary to these fears, the currency has seen as resurgence, with monetary policy and business conditions pushing it to its highest level in over a year. Other areas of Mexico’s economy are similarly seeing positive growth, the country being one of the strongest-performing markets in 2017, with the MSCI Mexico Share Price Index soaring by 30.2% year-to-date.

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Up until the second quarter of 2017 Mexico saw 16 straight quarters of economic growth, with exports alone valuing $198 billion. In the first six months of 2017 the export industry in Mexico increased 10.4% year on year according to Mexico’s National Institute of Statistics and Geography. Mexico’s number one export sector is the automotive industry, representing 76.8% of all exports to the US, and it saw a leap of 9.8%. It was estimated for the June quarter that the country would see an economic increase of 0.2% which they met three-fold, up 0.6%. Having created a record number of new jobs much of this rise is due to performance in the services sector which, although not as substantial as the 3.7% increase of the first quarter, was still up 3.2% year-on-year in the second quarter.

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However, not all investment news is positive for Mexico following President Trump’s indication that the North American Free Trade Agreement (Nafta) trade negotiations could turn sour. On the 23rd of August the iShares MSCI Mexico Capped exchange-traded fund dropped by 0.5%. Mexican stocks also took a hit, with Cemex down by 0.3%, and America Movil falling 0.8%. Kansas City Southern, which is exposed to Mexican trade via its railroad network, saw its shares plummet by 2.4%. Wal-Mart de Mexico and Grupo Televisa, however, rallied up 1.4% and 0.6% respectively.

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Despite these slips in stock values Mexico’s economy has remained resilient in 2017, amid fears that political changes could have negative impacts on the country. In the second quarter of this year GDP was up 0.6%, slightly lower than the 0.7% growth of the first quarter, but a rise of 1.8% compared with the same period of 2016. While these progressions bode well for Mexico’s economy, uncertainty concerning the renegotiation of Nafta and the effects it will have on the second-largest economy in Latin America still exists.

(Please note: James O’Leary does not currently hold a position in Kansas City Southern, Wal-Mart de Mexico, or Grupo Tevevisa. Henry James International does not currently own a position in Kansas City Southern. Wal-Mart de Mexico, or Grupo Tevevisa.

Please note: James O’Leary currently holds a position in CEMEX and American Movil. Henry James International currently owns a position in CEMEX and American Movil).

The Effect of Recent US Political Events on Investments

The US has recently experienced a number of political events that have had immediate repercussions in the investment sector. Many analysts, however, believe that the markets’ responses are short term and that there will be little impact on the financial world in the long run.

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On the 8th of August President Donald Trump issued a warning to the leader of North Korea, Kim Jong-un, stating that he would unleash “fire and fury” in response to any military provocation from the East Asian country. The warning came shortly after North Korea announced they had successfully created a miniature nuclear warhead small enough to fit inside the top of their missiles. Following the confrontation the Dow Jones Industrial Average experienced its largest one-week drop since March, falling by 1%, or 234.49 points, to 21,858.32. Other indexes followed suit, with the Nasdaq Composite reaching 6256.56, down by 1.5%, and the Standard & Poor’s 500 index dropping 1.4% to 2441.32. Despite this downward trend many experts, such as chief economist and strategist at Gluskin Sheff, David Rosenberg, believe that this is a short-term change and that the damage that this geopolitical conflict has caused is unlikely to last.

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The Dow Jones Industrial Average, after having regained some ground, was again hit following the president’s response to the recent events at Charlottesville on the 12th of August. In the wake, the index dropped to 21,674.51, a fall of 0.8%. The Standard & Poor’s 500 index saw a further decline of 0.6% to 2425.55 and, for the fourth week running, the Nasdaq Composite was down, sliding 0.6% to 6216.53 in its longest weekly losing streak since May 2016. While President Trump’s controversial statement lend, in part, to these declines, other world political events may have had impacts on the economy too. Terror attacks in Spain as well as controversial minutes from both the European Central Bank and the Federal Reserve contributed to a period of investment uncertainty. Rafiki Capital Management’s Head of Research and Strategy, Steven Englander, believes that these dips will, again, be equally short-lived as the political situation re-stabilizes.

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Without the threat of an acute political or economic crisis, investment markets should return to previously good performance levels, boosting the country’s economic growth. Indeed the Atlanta Fed’s GDP Now predicts that the US’s GDP will increase by 3.8% in the third-quarter of 2017, with the current drops in market activity being the result of short term anxiety amongst investors.

Developments as the Travel Sector Takes Off

International travel is more popular today than ever before, with the International Air Transport Association stating that airline passenger demand grew by 7.8% in June 2017. To keep up with this growing demand, travel companies have to continuously adapt and develop to stay competitive.

In 2015 the travel company Expedia bought over HomeAway, an accommodation rental site, in an attempt to rival Airbnb. Work is now under way to better integrate the two platforms, making it easier for customers to find holiday homes as well as flights all on one same site. In the current quarter the number of rentals available on the main Expedia site was increased from 20,000 to 60,000. The investment in HomeAway has so far yielded positive results for Expedia, with revenue increasing by 31% relative to the level of revenue in the same time period of 2016. Overall earnings were higher than predicted, boosting investor confidence. As a result the price of Expedia shares was up 3.4% on the 28th of July.

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As Expedia’s position in the travel sector gets stronger other, rival companies are struggling to keep up. Travel comparison site TripAdvisor has launched a campaign of television advertising in an attempt to reach a larger audience. The company aims for the television strategy to benefit its financial situation in the long term but has noted that, in the short term, profits could take a hit. Although the company’s second quarter earnings exceeded expectations, it may still fall behind other big name travel businesses such as Expedia and Priceline whose spending on advertising along is more than TripAdvisor’s revenue.

The increased demand for international travel has benefited aircraft companies as well. BOC Aviation, Asia’s largest aircraft operating leasing company, has grown its portfolio to 261 planes, from only 50 in 2004. With another 80 deliveries planned it is set to be the largest buyer of aircrafts in 2017. This increased demand for air transport has pushed shares of BOC Aviation up by 7% from last year while DBS Vickers analyst Paul Yong predicts that the company will see its net profit rise by 18% annually over the next five years. Major US airline Delta Air Lines has similarly benefited from the increased demand for flights. Shares have reached $50, which is around nine times its 2017 estimated earnings per share, with Andrew Bary of Barrons believing there is a possibility of Delta’s stock rising by a further 35% in the next couple of years.

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As travel becomes accessible to more people many companies in the sector will continue to benefit. However, with so many companies offering similar services, some are destined to fall behind in the market if they do not innovate.

(Please note: James O’Leary does not currently hold a position in Airbnb, Expedia, Trip Advisor, Priceline, or BOC Aviation. Henry James International does not currently own a position in Airbnb, Expedia, Trip Advisor, Priceline, or BOC Aviation.).

(Please note: James O’Leary currently holds a position in Delta Airlines. Henry James International currently owns a position in Delta Airlines).

The End of LIBOR

It has been announced that the UK Financial Conduct Authority (FCA) will be phasing out the main interest rate indicator, the London Interbank Offered Rate (LIBOR), by the end of 2021. This decision was reached as the FCA deemed the indicator has become unreliable. The LIBOR is a 50 year old global borrowing benchmark based on a daily price. This price is set at 11.45am GMT by averaging submissions from a group of 20 banks of a rate that they believe they could borrow money from other banks at. This rate is then used as a standard for pricing loans, mortgages, and other financial transactions and spans five different currencies.

This is not the first time that LIBOR has made headlines, having been the subject of controversy in the past when it came to light that banks had been submitting false data in 2012. As a result several of the big banks involved in the scheme were fined around $9 billion and several bankers were convicted for manipulating the projected rates.

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The decision to replace LIBOR within the next four years is predicated upon the fact that the underlying market of bank borrowing that LIBOR measures is not active enough to be a reliable measure. For one currency in one lending period in 2016 there were only 15 transactions. Andrew Bailey, widely predicted to be the Bank of England’s next governor, questioned “if an active market does not exist, how can even the best run benchmark measure it?”. As of yet no alternative has been announced, however, two measures have been suggested as potential replacements. Bailey has recommended the UK’s Sterling Overnight Index Average (SONIA) and a broad Treasury repo rate, which will reflect the cost of borrowing money secured against US government debt, as two viable benchmarks, both being strongly based in significantly active markets.

Despite the proposal of suitable alternatives there are some that believe that this transition will not be completed in the next four years with $350 trillion still in outstanding derivatives, mortgages, and loans to move to a new system. Mark Cabana, a strategist with the Bank of America Merrill Lynch, says that many banks may continue to contribute to the LIBOR rate after 2021. By this point it will no longer be necessary for banks to contribute calculations for rates in sterling, however, the LIBOR administrator, the US’s Intercontinental Exchange, may still publish the dollar rate.

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Despite the disagreement over deadlines it is certain that LIBOR, following corruption and growing irrelevance, is on its way out, to be replaced by more accurate and relevant rating systems.

The Impact of a Global Shift to Renewable Energy

As fossil fuel reserves are depleted companies have been looking for alternative sources of energy. However, does this mean that renewable energy companies are performing better than suppliers of traditional energy sources? At the end of 2016 over 24% of global electricity was produced from renewable sources, with hydropower being the leading source. Wind power accounted for 4% of this and 1.5% was from solar energy. These numbers, however, were still heavily overshadowed by energy from fossil fuels.

Hydroelectricity, which is the current frontrunner in the renewable energy sector, seems to be holding stable within its position. Brookfield Renewable Partners, which owns 215 hydroelectric facilities across North America, Latin America, and Europe, finished 2016 with revenue of $2.45 billion, a massive increase on the 2015 revenue of $1.63 billion.

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Increased interest in solar energy had seen huge advancements in the field, with solar power becoming increasingly cheap to generate. However, this in turn has meant that over the past year, solar stocks have experienced large declines in value, with some of the top companies being down by 50%. This slump may be caused by decrease in demand for solar panels in China, as well as a glut of panels, forcing prices down. Despite the current downward trend the outlook for solar energy companies is still positive, as the cost of generating power from the sun appears to be lower than the cost of generating it from fossil fuels. As more people are turning to this alternative energy source 2016 saw solar energy make up nearly 40% of all new energy installations, and companies seem to be recovering lost ground. First Solar Inc. saw first quarter revenue of $891 million, far beyond the $691 million consensus estimate.

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Companies working in wind power could also be set for increases in stock value. In the last year wind energy made up only 5% of total energy produced, but the American Wind Energy Association estimates that in the next ten years this figure could rise to 20%. As of the 10th of July the company Vestas Wind Systems A/S saw its stocks trading at $31.63, an increase of around 44% over the last 12 months. General Electric is also making a name for itself as a worldwide leader in the wind power sector, with the announcement of a planned acquisition of LM Wind Power for $1.7 billion.

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While some renewable energy companies are experiencing lulls in their revenue, it may be short-lived as, according to the Energy Information Administration, the costs of generating power from renewable sources is much less that the cost of power production from traditional sources. In the current economic climate it only costs around 1.3 cents per kilowatt hour to generate power from hydroelectric systems, and about 2.6 cents per kilowatt hour to produce electricity with nuclear power. As various companies work to create solar panels at a lower cost, solar energy could see a similar fall in cost to produce energy.

(Please note: James O’Leary does not currently hold a position in First Solar Inc., LM Wind Power, or Brookefield Renewable Partners. Henry James International does not currently own a position in First Solar Inc., LM Wind Power, or Brookefield Renewable Partners for any client portfolios).

(Please note: James O’Leary currently holds a position in General Electric and in Vestas Wind Systems A/S . Henry James International currently owns a position in General Electric, and in Vestas Wind Systems A/S in client portfolios).