Why Shorting Mexican Stocks Looks Smart

It somehow seems like a long time ago, but cast your mind back to the morning after the U.S. election in November of last year. The market reaction caught many people by surprise as, after futures initially fell when it became clear that Trump would win, the rally in stocks that brought us to new highs began.

Since then we have become somewhat accustomed to much of what conventional wisdom said about a Trump Presidency’s effects on financial markets being proved wrong. Gold fell and then rebounded, and the dollar surged and then retraced. It seemed that by the actual inauguration every initial assumption was being questioned and those initial moves quickly retraced.

The prevailing opinion became that the political pundits are right when they point out that what the President said on the campaign trail is pretty much irrelevant now that he is faced with the harsh realities of actual governance. Reality caused the initial travel ban to be revised, for example, and caused a distinct softening of the “rip up the trade agreements” approach that was a centerpiece of the campaign. Talk of a border adjustment tax faded away and even one of the most obvious post-election trades, selling Mexican stocks, began to backfire.

If campaign rhetoric was to be believed, selling the iShares Mexico ETF (EWW) short was a sensible thing to do. Building a physical wall between the two nations and backing out of NAFTA, which Trump derided as one of the worst deals ever were, after all, centerpieces of the campaign throughout. By January, however, the market started to bet on both of those priorities being shelved. There was a new reflationary trend around the world and things were looking up, even for Mexico.

It should not be forgotten though that the initial move down in EWW happened for a reason, and that reason still exists. Donald Trump believes that NAFTA and similar agreements are bad for America and bad for American workers. It is possible to argue with that opinion, but whether it is right or wrong is not the point here.

If the President believes it and, more importantly, has publicly stated on many occasions that he will do something about it, the betting on an outcome that somehow benefits Mexico is foolish.

Regardless of whether NAFTA is renegotiated or scrapped altogether the trade relationship between the U.S. and Mexico is about to change and it is hard to see any way in which that can be good for our Southern neighbor. Around 80 percent of Mexico’s trade is with America, so the economic impact of any change will be massive. Given that the fact that Mexican stocks are basically at the same level as before the election makes no sense whatsoever.

It seems to me that markets are making the same mistake as most did back in November and underestimating Trump. We are still finding out a lot about him and his governing style, but by now a couple of things should be clear to anybody who is paying attention: he has a lot of pride and is no slave to conventional politics.

It is reasonable to assume that those two traits, combined with the power that accrues from being such an essential trading partner to Mexico, mean that things will change, and not to Mexico’s benefit. On that basis, selling Mexican stocks at these levels, whether to take profit or establish a short position, looks like a smart move.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

Read Martin's Bio