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.

Trump’s Effect on the US Economy

Four weeks have passed since Americans across the country took to the polls and chose Donald Trump as the next President of the United States – but what effect has that had on the US Economy?

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The first thing of note is that, contrary to the example set in Britain post-Brexit, US stocks have soared since Trump’s election. The S&P 500 index, Dow Jones Industrial Average, and Nasdaq Composite Index have all reached record highs since November 8th. This upward swing is even being called a “Trump rally” by some.

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Experts’ feelings on Trump’s economic plan – which involves boosting public spending and introducing tax cuts and reforms – is divided, though most believe it will lead to a sharp increase of both growth and inflation. Trump’s promised corporate tax cuts will be financed largely by higher public borrowing which, although it may certainly stimulate growth, will create bigger budget deficits.

The Paris-based Organisation for Economic Cooperation and Development believe GDP growth is likely to be greater under Trump than it was under Obama, with predicted figures currently standing at 2.3% in 2017 and 3% in 2018. This compares to growth of just 1.5% this year and the 2.2% average annual rate during the current president’s second term.

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Trump’s pledge to dedicate $550bn to rebuilding crumbling infrastructure across the country is likely to push the US towards full employment. Coupled with deregulation and banks being encouraged to loosen lending standards, this growth is bound to push inflation higher as time goes on.

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One thing which remains to be seen is what effect Trump’s presidency will have on the global economy. With a general move away from free trade and globalisation – including policies such as amnesty for multinationals who repatriate foreign profits – at a time where the global economy is less than strong, the US could end up endangering a number of emerging global economies.

One country at least seems to be pleased with the election results. Trump’s views surrounding climate change and global warming has translated into promises to cut red tape for the fossil fuel industry – a move which could prove very useful for Saudi Arabia. The Saudi energy minister Khalid al-Falih believes that US oil consumption will recover in 2017 leading to a stabilisation of oil prices, though it was not explicitly stated that this would come as a result of Trump’s election and potential return to a 3% rate of growth in the United States GDP.

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