A surface reading of the Donald Trump's impact on the global economy suggests that there is one clear and present loser: Mexico. The new president has hurled so many threats down Mexico way, it's actually hard to remember all of them. Let's see, there's the wall (which he'll get Mexico to pay for, somehow), and the “big border tax” on Mexican imports, and also the broader border adjustment tax on all imports. There's NAFTA renegotiation (which, we Canadians like to think, will hurt Mexico more than us) and the crackdown on undocumented immigrants, and the snubs to Mexico's leadership.
I'm probably missing something, but even that short list adds up to bad news for NAFTA's third amigo, right You would think investors must be running for the hills.
And for a time, they did: In the 10 days following Trump's Nov. 8 victory, the Mexican Bolsa IPC index, or Mexbol, fell off a cliff, plummeting 8.5 per cent and sealing Mexico's fate as one of the 10 worst-performing markets in the world in 2016. The story since then, however, provides an interesting counter-story to all the bad news for Mexico. In fact, despite all the doom-and-gloom and the threats from the White House, investors in the Mexican market have been doing rather well, thank you.
Since Nov. 18, the Mexbol has gained about 9.5 per cent. Over the past three months, it has risen by more than eight per cent – outperforming the S&P/TSX composite, the S&P 500 and the vaunted Dow Jones industrial average. On Friday, the Mexican market ended a pretty remarkable week in which it gained 3.1 per cent, including a one-per-cent rise on Friday alone. On the same Friday, the iShares MSCI Mexico ETF (NYSE:EWW) – a popular entry point to the Mexican market for outside investors – rose 1.5 per cent, putting the fund's three-month return near 13 per cent.
More remarkable, perhaps, was that the Mexbol hit (and then surpassed) 48,470 — where it sat at end of day on Nov. 8, 2016, when Hillary Clinton was still widely expected to become the next president of the United States.
So, you might ask yourself, what happened to the Trump effect Well, this might be in part a case where the disease is part of the cure — namely, the impact on the Mexican peso and the boost it has given to Mexico's export competitiveness.
Only the Turkish lira has performed worse than the peso since Nov. 8, as currency markets responded to an injection of U.S. trade policy uncertainty. But Trump's wall — either the physical or the figurative (tariff) one — hasn't been built yet, and the peso's fall has only made it more attractive for U.S. companies and consumers to buy Mexican. Last November, Mexico's total exports were the highest on record for that month. December 2016 exports to the U.S. were 1.5 per cent higher than the year previous; January 2017 exports were up 4.8 per cent over January 2016.
All things being equal, Mexico seems poised to capitalize on the twin benefits of a surging U.S. economy and a weak currency. You could say much the same for Canada: since mid-2014 our currency has been in a long-term slide against the greenback, too. But the peso's more recent drop has been sharper. In fact, since November, the loonie's real broad effective exchange rate (adjusted for relative consumer prices) has relative to the U.S. dollar, while the peso's effective exchange rate has declined. On a currency basis, then, Mexico has become trade competitive in its largest export market, while Canada has fallen behind.
Of course, you might argue, but all things aren't equal: Mexico still faces huge uncertainty over trade. That's true. But the first few months of the Trump administration have already demonstrated that “getting things done” is a lot harder to achieve in office than to promise on the campaign trail.
From its reversible immigration ban to its muddled handling of healthcare reform, the new administration is running into roadblock after roadblock on the implementation of some of its key policies. On others, it has been strangely reticent. The Trump “budget blueprint” released last week made no mention of trade (other than to propose eliminating funding of the U.S. Trade and Development Agency, which works to foster exports to emerging economies). It made no mention of the dreaded border adjustment tax or tax reform in general, other than to punt the issue to the full budget proposal later this year. And the wall The blueprint threw a few billion at it, but didn't say anything about Mexico paying.
So sure, things might look pretty bad south of the Rio Grande when the Trump administration finally manages to get things done. But Mexico might prove the doubters wrong, at least while dithering and delay remain the rule in Washington — and that could be a very long while.