On The Bilateral Trade Between USA and Mexico

Mexico is one of the three important trading partners of USA. The Southern neighbor is not only a major exporter of goods to the US market, but the U.S. also exports a substantial amount of goods to Mexico. The following table shows the major trade partners of the US:

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Source: A Seaworthy Mexico into the Maelstrom by Pablo Echavarria, CFA, Thornburg Investment Management

Mexico had a trade deficit of about $60 billion with the US in 2016 compared with a trade deficit of $366 with China. Mexico is the 2nd largest export market for US after Canada.

From the above article:

Nomura recently calculated the imports/exports ratio for several U.S. trading partners (a measure of balance in bilateral trade relations.) Mexico’s ratio is 1.27x (that is, for every $1.27 of goods imported into the U.S. from Mexico, the U.S. exports $1 of goods to Mexico). That compares favorably to the ratios of the U.S.’s other main trade partners: China at 4x; Korea at 1.7x; and the Eurozone at 1.5x. Moreover, one U.S. Class 1 railroad company running between the U.S. and Mexico recently reported that approximately 60% U.S./Mexico traffic is southbound, and added that it’s actually growing faster than northbound traffic. (emphasis mine)

So the key takeaway is trade with Mexico is not a one-way street meaning it is not just Mexico that is benefiting from sending goods to the US market. This important fact is not widely mentioned as Mexico becomes the target of the current political climate. As noted above U.S. also benefits from selling a lot of goods to Mexico. Hence trade war with Mexico will adversely both countries and not just Mexico.

Also see: The US shouldn’t blame Mexico for “losing” at trade — it should blame Germany, FT Alphaville

On Germany’s Trade with the U.S.: Chart

The EU is the largest trade partner for Germany account for 56% of total turnover. At 9%, the US is second major trade partner.Last year German exports to the US totaled 143 billion Euros.

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Source: The New Age of Protectionism- Trump’s Attack on Germany and the Global Economy, Der Spiegel

The US market is a major market for German auto makers Daimler, Volkswagen, BMW, Audi and Porsche. While the first three have manufacturing facilities in the country, all Audi and Porsche vehicles sold in the US were imported from Germany.

Also see: Germany Inc. Touts Benefits of Trade After Trump Dumps on Euro, Bloomberg

Goldman: European Stocks May Outperform US Stocks This Year

European stocks are projected to beat US stocks this year, according to an article in Bloomberg yesterday quoting Goldman Sachs. From the article:

European equities will catch up to their U.S. peers once the uncertainty surrounding near-term elections is lifted, according to Goldman Sachs Group Inc.

The Stoxx Europe 600 Index will return 8 percent including dividends by end-2017, boosted by a weak euro, strong global growth and recovered oil prices, according to Christian Mueller-Glissmann, managing director of portfolio strategy and asset allocation at Goldman Sachs in London. The S&P 500 Index will return 4 percent, Goldman predicts, as optimism about economic growth in the U.S. fades and mutes the stock rally. The return forecasts are in local currencies.

“U.S. equities will net still be up, but less than Europe, which is catching up,” Mueller-Glissmann said in an interview at Goldman’s offices in London. “What is generating optimism in the U.S. right now are the tax cuts and fiscal spending, and both of those might be watered down over the course of the year. We have a pretty good set-up for Europe to do well.

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Source: Goldman: Europe’s Stocks to Return Double U.S. Equities in 2017, Bloomberg, Jan 29, 2017

After years of lagging their American peers, firms in Europe are in a better shape now and have better potential to deliver higher returns. Recently I posted the following chart from Schroder’s:

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Investors looking to diversify and gain exposure to European equities may want to consider adding high-quality stocks from the continent.In addition, the Callan Periodic Table of Investment Returns shows that no one country is the top performer consistently.


Source: Europe best placed for cyclical upswing, Money Observer

S&P 500 Highs Since Inception: Chart

The Dow Jones hitting the 20,000 mark was big news in the media last week. While the Dow is popular, the S&P 500 is more representative of the broader US economy.

According to an article by Brian Levitt at Oppenheimer Funds, the S&P 500 has had 964 new highs since its inception in 1957. In 2016 alone it had 18 new highs.

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Source: Dow 20,000: We Did It!, Brian Levitt, Oppenheimer Funds

Which Emerging Countries Are Most Exposed To The US ?

Global trade has become the focus of attention in recent weeks with President Trump’s proposed plan to implement 20% tariffs on good imported into the US from Mexico. Emerging countries depend on exports to developed countries since developed countries are major consumers of goods produced cheaply in emerging countries. Countries such as China are major exporters of goods to the US.

So with trade wars looming in the horizon, which emerging countries are most exposed to the US market?

Contrary to popular belief many emerging countries have limited exposure to the US. So American trade wars alone cannot submerge emerging market economic growth.

According to a report by Schroder’s China may not affected too much due to US actions since China’s exports to the US account for only 4% of its GDP. However Mexico will be highly affected by US tariffs as the country’s exports to the US amount to nearly 30% of its GDP. While China’s trade is more diversified especially with many Asian partners, US’ southern neighbor Mexico is strongly connected to the American economy.

The chart below shows the emerging countries most exposed to the US:

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CNY – China
INR – India
MXN – Mexico
CLP – Colombia
RUB – Russia

Source: Schroders Economic and Strategy Viewpoint, Feb 2017

The report also notes that Brazil, Colombia and India are also less dependent on the US market.

The Periodic Table of Commodity Returns 2007 Thru 2016

Investing in commodities is not suitable for most retail investors despite pushing them as an asset class to own. Just like stocks and bonds, hundreds of ETFs, mutual funds and other instruments exist to invest in them. Commodity investing is probably the 2nd most risky proposition after currency trading/investing. This is because unlike stocks or bonds or other assets, commodities are extremely risky by nature. For example, the price of crude oil on the global markets can change based on any number of reasons. A handful of men knocking out an oil pipe in Nigeria for example, can cause the price of oil to increase. Besides investors have to understand and worry about situations like Contango. Though gold is one commodity which is preferred by many investors, it is still not suitable for all investors. Gold as asset class does not produce any consistent income such as dividends and the only way to profit from investing in them is by price appreciation. Agricultural commodities are even riskier as natural events like rain or droughts can impact prices of corn, soybean, coffee, rice, cocoa, wheat, etc.

With that introduction, below is The Periodic Table of Commodity Returns for 2016:

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Source: US Funds

Download: The Periodic Table of Commodity Returns 2007 Thru 2016 (in pdf format)

Last year, coal was the top performing commodity which more than doubled in price. The outcome of US elections gave a boost to coal is an understatement.After a few years of low to stagnant prices, crude oil soared in 2016 with a return of over 45%.

Related ETFs:

  • SPDR Gold Shares (GLD)
  • United States Oil Fund LP (USO)

Disclosure: No Positions