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Think Mexico and Canada to avoid some of the risks of the U.S. market--especially a falling dollar
02/10/2012 8:30 am EST
May I suggest that you take two stock markets—those of Mexico and Canada—and call me in the morning?
If you look just at the U.S. stock market what you see is a confusing mix of short-term strength and long-term weakness. And you are left wondering, day-to-day, which time horizon investors will choose to emphasize.
On the strength side, the U.S. economy is growing faster than any other economy in the developed world. The year-to-year growth of 2.8% in the fourth quarter looks great when you compare it to a stagnant Japan and a Europe that’s headed toward a recession in 2012.
But, on the weakness side, as Standard & Poor’s was so kind to remind investors on February 8, the United States still hasn’t begun to deal with its current budget deficit or the long-term trends feeding that deficit. The credit-rating company, which downgraded the United States to AA+ from AAA on August 5, warned that the United States faces a one-in-three chance of another downgrade within the next six to 24 months.
Strength side again--the Dow Jones Industrial average is flirting with its May 2008 high, and is within a 10% rally of its all-time high of 14,164.53 set on October 9, 2007—when Lehman Brothers still existed and the government didn’t own a piece of either General Motors (GM) or American International Group (AIG).
Weakness? But the U.S. dollar, which looked so strong just a month ago, has fallen to a three-month low. Since its peak on January 13 the dollar had tumbled 3.7% by February 8 against a basket of currencies that includes the euro, the yen, the pound, the Canadian dollar, the Swedish krona, and the Swiss franc.
Now I’m not going to suggest that putting your money—or some of your money anyway—into Canadian and Mexican stocks is going to eliminate this conflict—or eliminate the risk that goes with it.
But I would suggest that buying Canadian and Mexican stocks right now is a good way to get most of the good effects of U.S. economic growth while avoiding the bad effects of a falling dollar. In fact, if the dollar does continue to slide, you might even pick up some extra gains from the appreciation of the Canadian loonie and the Mexican peso.
See whether this strategy makes any sense to you.
The Mexican and Canadian economies are very closely linked to the U.S. economy. About 74% of the exports from those two countries go to the United States. During the U.S. recession that wasn’t a good thing as Canadian exports of autos and auto parts, for example, and Mexican exports of cement, for example, fell. With a strengthening of the U.S. economy, however, that trend has reversed.
But Mexican and Canadian monetary policy and interest rates aren’t pegged to the actions of the U.S. Federal Reserve. The Reserve Bank of Canada is one of the few central banks in the developed economies not to march down the road toward further interest rate cuts. The bank has had a 1% benchmark interest rate in place since September 2010. Remember that the Fed has set its benchmark rate at 0% to 0.25% until the end of 2014. The European Central Bank kept its benchmark rate at 1% at its February 9 meeting after cutting rates by 0.25 percentage points in November and December. But with the EuroZone slipping into recession, the pressure will be on the bank to cut rates in the year ahead rather than raise them.
The Mexican central bank, the Bank of Mexico, has been among the most reluctant central banks in the developing economies to act to push down its currency to promote exports. In fact in the bank’s last major currency intervention in November, it acted to support the peso, which had tumbled as a result of the euro debt crisis. That’s a huge contrast to countries such as Brazil, where the central bank has intervened to hold down the price of its currency.
Neither Canada or Mexico is contemplating anything like a new round of quantitative easing—as the U.S. Federal Reserve is still studying--that would add hundreds of billions of dollars to the money supply.
All of that has put the two currencies among the best performing currencies in the world in 2012 to date. The Mexican peso is up 10% against the dollar in 2012 and 8% against the euro. The Canadian dollar hasn’t been as strong but it has still managed to be the 10th-best performing major currency in 2012.
If you’re interested in putting the strength of these two currencies and their participation in the growth of the U.S. economy in your portfolio, what do you buy?
In Mexico, if you can trade on the Mexico City stock exchange, I’d recommend Wal-Mart de Mexico (WALMEXV.MM). The company, Mexico’s largest retailer, just reported 4.7% same store sales growth in January. Grupo
Grupo Bimbo, Mexico’s biggest bread company, will give you much the same exposure to rising incomes in Mexico and an improving economy as Wal-Mart de Mexico. Most of the stock’s float is in Mexico City (BIMBOA.MM) but there is a little bit of volume in New York (GRBMF.)
You’ll get more U.S. volume—about 25,000 shares a day—and an exposure to the Mexican commodity export market with Grupo Mexico (GMBXF in New York and GMEXICOB.MM in Mexico City). The company, the parent of Southern Copper (SCCO in New York), owns and operates businesses ranging from mines to railroads in Mexico. In November Mexico doubled its copper production from a year earlier as a long strike at Grupo Mexico ended. (Why Grupo Mexico instead of Southern Copper? Grupo Mexico gives you more purely Mexican exposure while Southern Copper will give you more exposure to South American countries such as Peru.)
And finally, for Mexico, you’ll get the most U.S. volume and the most upside potential and downside risk with CEMEX (CX in New York). The cement maker got slammed twice by the global financial crisis because it had just loaded up its balance sheet with debt to pay for acquisitions just before the financial crisis sent the global economy—and demand for cement in the United States and Europe—into a tailspin. The modest recovery in cement demand and some painful but necessary asset sales have walked Cemex bank from the financial brink and the continued modest recovery in U.S. and global demand (although not in Europe) for cement gives the company a good shot at finding a way to meet its next big set of financial deadlines. Buying Cemex is a bet that the company can—and that the stock will climb once that danger is shoved to the background.
In Canada ordinarily I’d start with a bank or two, but the sector is currently laboring under fears of a U.S.-style mortgage crisis. If there is a crisis, it will be a Canadian version with much less destruction of value since the Canadian banking industry is much more tightly regulated than its U.S. counterpart, but I’d still put off buying into this sector.
But Canada leaves you lots of wonderful commodity plays that will get you exposure to improving U.S. economy and steady demand from China. After recent reports showing a solid increase in the acres farmers in the U.S. are planting this year, I think it’s time for a spring planting play on either Potash of Saskatchewan (POT) or Agrium (AGU in New York or AGU.CN in Toronto). Of these two, Agrium gets my nod because it isn’t a pure play on potash but also sells natural gas-based fertilizers. That’s a market I like with natural gas prices really low.
Finning International (FINGF in New York and FTT.CN in Toronto), the world’s largest dealer for Caterpillar (CAT) equipment, gives you another way to play the rising sales of that U.S. equipment maker. (Finning International is set to report financial results on February 16.
As you might expect, Canadian and (especially) Mexican stocks are sensitive to the risk-on/risk-off surges and retreats that we’ve seen in the market since the latest outbreak of the Greek debt crisis. If that crisis moves to the back burner for a while, that should help these two markets.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund owned shares of Agrium as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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