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Why NAFTA’s Collapse Could Badly Hurt Mexico

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Direxion

Mexico’s Day of the Dead may remember recent stock market performance 

For over a year now, Mexico has faced criticism from Trump for various reasons. He still wants to build his well between the United States and Mexico. But for most of the year, the Mexican stock market rallied with the rest of global markets. In July, the Mexbol rallied over 13% for the year. But since that peak, it has fallen 4%, with the average stock falling even more. Recent woes may have centered on the Trump administration’s demands from Mexico in NAFTA renegotiations—or they may just reflect a slower economy. Direxion’s MEXX (3x Bull) Mexico tracks the performance of all market caps within the Mexican stock market and is a bit more concentrated. The MSCI Mexico IMI 25/50 Index, the basis for the MEXX, is down 10% since July, so the MEXX is down 30%. If the dead do rise, they’ll have a long way up.

Source: Bloomberg. Past performance does not guarantee future results.

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The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. Returns for performance under one year are cumulative, not annualized. For the most recent month-end performance, please visit direxioninvestments.com

Market Realist

Mexico’s stock exchange is under pressure

Though Mexico’s stock market (EWW)(MEXX) is up 9.5% YTD through October 20, it’s down 3.3% after reaching its yearly high in July. Mounting concerns over the continuation of NAFTA (North American Free Trade Agreement) talks and subdued economic growth have led to some pessimism in the market.

These concerns have also affected the peso, pushing it down to a five-month low. In the past three months, the peso has weakened as much as 8.6% against the dollar—the worst performance among emerging-market currencies. And these falls have come despite oil prices (XLE)(USO) gaining over 20% since June. A pick-up in oil prices usually supports the peso.

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Impact on the economy

NAFTA is a trade deal between the United States (SPY) (IVV), Mexico, and Canada that eliminates most tariffs on imports and exports among the three countries. The failure of talks would lead to increased tariffs on Mexico’s exports to the United States, damping hopes for Mexico’s economy. Many corporates have kept their investments in Mexico on hold until NAFTA talks resolve. Moreover, the prospect of a weaker peso is eroding consumer confidence, further aggravating the situation.

Earnings likely to fall

NAFTA concerns and overall pessimism in the economy have hurt corporate earnings expectations. The IPC Index, which comprises 35 stocks that trade on the Mexican Stock Exchange, is likely to see its earnings fall around 35% in the coming quarters due to broader economic uncertainties.

Though there’s pessimism in the air, the successful conclusion of NAFTA talks could boost overall business confidence, pushing the stock market to a higher growth trajectory.

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