Tequila Sunrise. Mexico is looking
bright! 22 July, 2012.
In July, the Mexican IPC
Index reached 40,000 and made many high historical high.
While US, Europe and Japan major stock markets are struggling to attract
investors, the Mexican stock market is more than 25% higher
than its peak in 2007 and 150% higher than its low in 2008. Many have
enjoyed the growth since the Mexican currency crisis in 1994 and the richest
person in the world, Carlos Slim, is a Mexican business man. Even more
charming is that they have a new president who is married to a real life soap
opera star. Sitting right next to the mighty United States, Mexico major
trade partners are US and Canada. So far,
everything about Mexico is pretty non Euro with the exception of its language.
According to the World Bank Group, in 2011, Mexico GDP
reached USD 1.16 trillion with population at 114.8 million. So its GDP is
almost half that of UK with twice the population. Automobile is a very
important industry in Mexico. It employs about a quarter of the labor
force. BMW, Mercedes-Benz and Volkswagen all have operation in
Mexico and 70% of the Jetta parts are designed here. Cemex, a
construction and cement giant, and Gruma, the world largest producer of
tortillas and corn flour, are Mexican companies. Mexico has strong high
tech and aerospace sectors which are benefited by NAFTA (North American Free
Trade Agreement) and can export to US and Canada. Mexico has the 6th
largest electronics industry in the world after China, US, Japan, South Korea
and Taiwan (where are the European?) and the 3rd largest
manufacturer of mobile phones after China and South Korea. And we all
remembered BP spilled some oil at the Gulf of Mexico. With such recipe, no doubt Mexican local investors are happily sipping their tequila sunrise.
For those who are interested
in emerging markets, like watching Tour de France, as BRIC (Brazil, Russia,
India, China) take a breather from charging for so long, we see other team
members like Mexico, Indonesia and Malaysia moving to the front and take the
lead. As a pack, the Emerging Markets
have the energy, determination and physique to take on the Tour. While the BRIC is already tangled with the
Euro crisis as these 4 countries are significant global players, the second row
countries have been focusing on their own business and have not got themselves
too involved with the Europeans.
“Liquidity is an anaesthetic, not the cure
to Europe’s banking problems.” said my City friend as we enjoyed our “liquidity”
from the tap. He was referring to all
the money pumping to banks to make sure banks can manage the cash flow. When the financial news reporter says the
interbank market dries up, it means banks are not lending money to each
other. This could create cash flow
problem for those banks who struggle to borrow from other banks while they have
financial obligation to meet. These
obligations could range from paying back their bond holders or paying back
corporates who withdraw cash from their accounts. As central banks step in and lend money to
the struggling banks, these weaker banks survive the cash flow issue. However, the deeper problem is these
struggling banks are often making losses.
Losses will eat into bank’s capital, that’s bank’s own money, not the
clients’ money in current accounts or deposit accounts. When a bank’s capital looks weak, clients worry this bank could run into deeper
problem and start taking money out.
Other banks refuse to lend money to this struggling bank. This is the vicious circle. To get
out of this spiral, as we saw in Spain, EUR 100 billion was injected to banks
in June. Are there money making
opportunities coming out of this injection?
2 observations. First,
politicians in EU seem to understand they cannot afford Spanish banking system
to melt. If this is the case, the same
goes for Italy. Second, since the
financial crisis and after a few banks being bailout, the bond prices of many
banks are priced for double-digit default rates over the next 5 years. In day to day language, many people fear
banks will go under and there is little demand for their bonds. Hence, low price. If now, people start to think these banks
will not go under because politicians ask the government to save them, these
bonds could worth a bit more. Worth
having a chat with financial advisors or private bankers about bonds in the
financial sector. High risk, high
return.
Amazon.com, almost anything that can be
shipped in a box would be found in Amazon.
They are growing in electronic sales.
Kindle, for example. It is also
growing its web services such as “cloud” services. The stock is trading at very high P/E ratio
(Price to Earnings Ratio). Well, to be
less vague, the current stock price is more than 100 times its earnings per
share. eBay share price is about 17
times P/E. Now, we can assume there are
many smart analysts and fund managers looking at the stock market. So why would people buy a shop and pay so
much money that it will take over 100 years to make the money back? Well, if you think this shop could grow like Wal-Mart
in the 80’s or has so much potential that it could double its profit every year
for the next 3-5 years, you may be paying for the right price. Just FYI, mighty Apple and Google are trading
at roughly 13 times P/E. Remember
Microsoft has teamed up with Barnes & Noble. The electronic Ecommerce space is exciting
but also crowded like London Olympics.
Food crisis! Worst US drought in 50 years sent agriculture
products prices sky high. Our breakfast
is going to get more expensive as corn, soy and wheat prices shot up. Corn and soy prices are now over 30-50% over
their peak prices in 2010 and over 10% higher than their peak prices in
2011. Wheat price is around its peak in
2011. Corn is also used for Biofuel and
soy is an important animal feed. So the
knock on effect could be meat prices. In
2008, there were social unrests in some countries due to the dramatic increase
in good prices. Some said the price
rally was driven by speculation in 2008.
This time, corn and soy price rallied are driven by falling supply due
to drought. Feeling lucky to buy some
corn and soy? Hold on. Some readers may have experience in trading
futures contracts on agriculture products and they may not have a warehouse to
take delivery. In the agriculture
commodities world, many contracts are settled physically and buyers and sellers
are obliged to exchange money for physical goods. If you do not have a farm, think twice before
trading agriculture commodities futures contracts. Investors could participate in some online
trading platforms that offer agriculture “contracts for difference” or “spread
bet”. Please beware that the commodity
prices on these online platform are closely correlated to their futures
contracts in the Exchanges. I would
strongly recommend investors to ask detail questions about how commodities
prices on the platform behave near futures contracts expiry. If this sounds foreign to you, you could
consider commodities related ETFs or funds.
My conservative approach to potential raising food prices is to fill the
fridge.
