Investors, Make a Run for the Borders

02/10/2012 9:30 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

If the US market has you stumped, take a close look at Mexico and Canada. Some key stocks in those nations could gain whether the US economy perks up or not, writes MoneyShow’s Jim Jubak, who also writes for Jubak’s Picks.

The crosscurrents in this market are enough to give you a headache.

May I suggest that you take two stock markets—those of Mexico and Canada—and call me in the morning?

The Baffling US Market
If you look only at the US stock market, you see a confusing mix of short-term strength and long-term weakness. And you are left wondering, day to day, which one investors will choose to emphasize.

On the strength side, the US 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 with a stagnant Japan and a Europe that’s headed toward a recession this year.

But on the weakness side, as Standard & Poor’s reminded investors Wednesday, the United States still hasn’t begun to deal with either 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? The US dollar, which looked strong just a month ago, has fallen to a three-month low. Since its peak on January 13, the dollar had tumbled 3.7%, as of 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.

So Run for the Borders
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 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 US economic growth while avoiding the bad effects of a falling dollar. In fact, if the dollar continues 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 sense to you:

The Mexican and Canadian economies are closely linked to the US economy, and about 74% of the exports from those countries go to the United States. During the US recession, that wasn’t a good thing. Canadian exports of autos and auto parts fell, for example, as did Mexican exports of cement, for another example.

With a strengthening of the US economy, however, that trend has reversed.

But Mexican and Canadian monetary policy and interest rates aren’t pegged to the actions of the US Federal Reserve. The Reserve Bank of Canada is one of the few central banks in the developed economies that has not marched down the road of 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.)

Similarly, the Mexican central bank, the Bank of Mexico, has been among the most reluctant central banks in the developing economies 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 nor Mexico is contemplating anything like a new round of quantitative easing—something the US Federal Reserve is still studying—which would add hundreds of billions of dollars to the money supply.

All of that has helped the two currencies rank among the best-performing currencies in the world so far this year. The Mexican peso is up 10% against the dollar in 2012, and 8% against the euro. The Canadian dollar hasn’t been quite as strong, but it still ranks in the Top 10.

NEXT: How to Buy into Mexico

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How to Buy into Mexico
If you want to put the strength of these two currencies and their participation in the growth of the US economy into 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 (which trades as WALMEXV.MM). The company, Mexico’s largest retailer, just reported 4.7% same-store sales growth in January.

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 (as BIMBOA.MM) but there is a little bit of volume in New York as Grupo Bimbo (GRBMF).

You’ll get more US volume—about 25,000 shares a day—and an exposure to the Mexican commodity-export market with Grupo Mexico (GMBXF). It trades as GMEXICOB.MM in Mexico City.

The company, the parent of Southern Copper (SCCO), 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 US volume and the most upside potential and downside risk with Cemex (CX). The cement maker got slammed by the financial crisis because it had loaded up its balance sheet with debt to pay for acquisitions just before the global economy—and demand for cement in the United States and Europe—went into a tailspin.

The modest recovery in cement demand—and some painful but necessary asset sales—has walked Cemex back from the financial brink. And the continued modest recovery in US and global demand (although not in Europe) for cement give the company a good shot at meeting its next big set of financial deadlines.

Buying Cemex is a bet that the company can get past that—and that the stock will climb once that danger is shoved to the background.

How to Play Canada
In Canada, I’d ordinarily start with a bank or two, but the sector is currently laboring under fears of a US-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 US counterpart. I’d still put off buying into this sector.

But Canada leaves you lots of wonderful commodity plays that will get you exposure to an improving US economy and steady demand from China. After recent reports showing a solid increase in the acres farmers in the US are planting this year, I think it’s time for a spring-planting play on either Potash of Saskatchewan (POT) or Agrium (AGU).

Of these two, Agrium gets my nod, because it isn’t a pure play on potash. It also sells natural gas-based fertilizers. That’s a market I like, with natural gas prices really low.

Finning International (FINGF), the world’s largest dealer for Caterpillar (CAT) equipment, gives you another way to play the rising sales of that US 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, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Polypore International as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio here.

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