Will NAFTA Renogotiatlon Help E-Commerce Retailers Or Hurt The Industry?

US negotiators in talks over the North American Free Trade Agreement (NAFTA) are pushing their Canadian and Mexican counterparts to significantly raise their limits on international goods that citizens can purchase online free of tax. Global consumer trends indicate rapidly increasing demand for online retail goods, but this change could also put many traditional retailers out of business, creating a complex political decision for all three leaders.

The rationale

US consumers can purchase goods online free of tax for up to $800 – while Canadian and Mexican consumers must pay a significant tax for online orders of international goods above $16 and $50, respectively. This can push up the cost, even doubling it in some cases, discouraging consumers from purchasing goods unavailable in their home countries.

The US, most likely recognizing the exponential growth of the online retail industry and the high proportion of US companies leading this growth, is pushing for its partners to make it easier for online orders to flow across North America. Canada and Mexico have been resistant. Various domestic industries have voiced concerns that enabling more consumers to skip bricks-and-mortar stores would put them out of business.

In 2016, the global e-commerce industry stood at nearly $2 trillion dollars, with North America accounting for about 21 percent. The Canadian and Mexican online retail markets remain immature as compared to the US, but both have more than doubled in the past five years, despite tax barriers.

Free trade aims to eliminate barriers to the flow of goods across borders and harmonize regulations to ensure fair competition. Canada and Mexico keeping their duty-free levels so low in comparison to the US can be interpreted as protectionism. But the growth of online retailers is a natural evolution of the industry. Maintaining strict limits on duty-free purchases may be delaying the inevitable.

Some win, some lose

Opening the doors for Canadians and Mexicans to affordably purchase more international products online would disproportionately benefit the American retail industry. Of the top ten largest global online retailers, five are based in the United States and none in Canada or Mexico.  The C.D. Howe Institute estimates that if Canada and Mexico increased the duty-free threshold to just $200 dollars, this could generate an additional $508 million and $86 million for their economies, respectively.

A boom in online sales from these countries would open up new markets for small and medium size retailers that typically lack the scale to reach international markets.

Similarly, the change would allow small businesses in Canada and Mexico that sometimes purchase supplies from the US to do so more frequently, and would empower remote communities. Residents of Iqaluit,the capital of Canada’s remote Nunavut province, increasingly use Amazon Prime to acquire products that are unavailable or too expensive via government programs.

However, the change could also inadvertently hurt traditional retailers. It would allow suppliers from countries with even cheaper labor, such as China and Vietnam, to flood the market with cheap goods, in bulk, that could still price in under the new limit. The domestic Canadian and Mexican retail industry is still largely dominated by brick and mortar retailers, meaning they would struggle to compete on cost and convenience under this new scenario.

Domestic political risks

This proposal should spur short-term economic growth across the NAFTA bloc. However, as it’s part of a series of controversial US-centric demands for changes to NAFTA, it creates some political scenarios looking out to 2018-2019 that could wipe out any net gains and threaten NAFTA’s survival.

It creates risks for President Donald Trump, given the contradictions between the proposal and his public stances. For one, it largely mirrors the goals included in the Trans-Pacific Partnership, the mega-trade deal that Trump scrapped his first month in office. More specifically, Trump has chastised companies like Amazon for their monopolistic practices and criticized the dumping of cheap goods into the US market by Chinese companies. Both Amazon and the Chinese online retailer, Alibaba, would benefit greatly from this change. If Trump is perceived as supporting a policy that boosts profits for companies already having many advantages in the market, while putting some US retailers and manufacturers out of business, this could anger much of his base.

Andrés Manuel Lopez Obrador (AMLO), a leftist populist, leads the polls for Mexico’s presidency in 2018, and brands himself as the anti-Trump figure who will protect Mexico’s dignity and counter Trump’s policies. AMLO is already highly critical of many aspects of NAFTA. The mere fact that Trump has proposed this US-centric package of demands for changes to NAFTA could embolden AMLO, if victorious, to enact a comprehensive set of protectionist policies to defend against what he will assert as an assault on Mexican industries.

Canadian PM Justin Trudeau presides over a healthy economy, with Canada forecastto lead the Group of Seven in economic growth this year and the consumer confidence index at an 11-month high as of July. Trudeau does not face reelection until 2019. But although he supports NAFTA as a whole, he will likely be wary of granting any specific concessions that could harm traditional industries, such as retail, that have been critical to economic growth, and risk angering the labor groups that constitute a large portion of his political base.

The bottom line

A renegotiated NAFTA will likely have to include some increase in Canada and Mexico’s duty-free limit. A healthy free trade agreement cannot have some industries open and others protected. The current discrepancy across the three countries is too large and the domestic demand for online goods too strong for Canada and Mexico to maintain the status quo.

However, each leader will operate under two constraints when it comes to any agreed-upon change: creating net economic benefit for their country and preventing harm to the principal constituencies that put them in power.


Samuel Schofield is a Contributing Analyst at Global Risk Insights. As originally appears at: http://globalriskinsights.com/2017/11/nafta-e-commerce-changes/

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

Why The US Must Shift Focus From Mexico To Central America To Combat Migration And Drug Flows

During the presidential campaign and throughout the first year of his administration, US President Donald Trump has repeatedly pushed for tougher enforcement of the United States’ southern border to curb illegal immigration and illicit drug flows from Mexico.

It is on Mexico’s southern border with Central America, however, that many of the current issues originate. Ironically, Trump’s harsh rhetoric and proposed cuts to international aid could inadvertently amplify these problems.

The US southern border

For decades the US experienced high volumes of illegal immigration from Mexico, largely due to economic hardship in Mexico and inadequate and inconsistent enforcement by the US. However, in recent years the net immigration from Mexico to the US has all but disappeared, and more Mexicans are in fact migrating within Mexico.

This trend began well before President Trump came to office. Pew estimated that from 2009 to 2014, one million Mexicans left the US and 870,000 arrived. Some of the changes stem from an improving economy and job market in Mexico, as well as improved border enforcement by both Mexico and the US. In the past year, undoubtedly, some have also been deterred by Trump’s threats of increased deportations.

The largest source of illegal immigration at the US southern border now comes from Central American immigrants, specifically from the Golden Triangle, or Guatemala, Honduras and El Salvador. These countries have not witnessed the same degree of economic growth as Mexico and high levels of corruption, poverty, and exposure to drug-related violence induce many to leave.

Many Americans remember the surge in 2014 of unaccompanied children from this region seeking entrance to the United States. Mexico deported around 140,000 people in 2016, approximately 96 percent of whom originated from the Northern Triangle countries.

When it comes to drugs, Mexican drug cartels remain the largest foreign suppliers of heroin, and methamphetamines to the US, according to the U.S. Drug Enforcement Administration (DEA). Mexican cartels have also become leading producers of Fentanyl, a powerful synthetic. Cocaine largely originates from Bolivia, Colombia, and Peru, but the DEA estimates that 93-94% of Colombian cocaine comes to the US via the Mexico/Central America land corridor.

Consequently, the need for drug cartels to move high volumes through this vast corridor has created significant employment opportunities in poor, Central American communities, but also widespread violence, which prompts many to flee north.

Efforts to improve southern border patrol

Recognizing the threats posed from Central America, in recent years, the US and Mexico have enacted joint efforts to strengthen enforcement of both the US and Mexico southern borders.  The US views this border as the first line of defense against illegal immigration and drug trafficking into the US and sees a role in filling the gaps that Mexico lacks the capacity to handle on its own that ultimately affect the American border.

In an effort to curb immigration from unaccompanied minors from Central America, in 2016 the US Congress approved $750 million to support the Obama administration’sNorthern Triangle Alliance for Prosperity Plan, which doubled assistance to Central America from 2014 levels.

On the security and law enforcement side, in 2007, the US and Mexico launched theMérida Initiative, a partnership aimed at disrupting organized crime, institutionalizing reforms that support rule of law and human rights, and creating secure and modernized  borders.  To date, the US Congress has appropriated $2.5 billion to the initiative.

Additionally, the US Department of State’s Bureau of International Narcotics and Law Enforcement (INL) and the US Department of Defense have worked to enhance Mexico’s police and border patrol agencies, in part by funding a $75 million telecommunications project to improve secure communications between Mexican agencies working in eight southern states.

INL has also implemented programs with the US Customs and Border Protection (CBP) and US Immigration and Customs Enforcement (ICE) to strengthen law enforcement institutions and train Mexican police and military units to improve drug seizures in the southern border zone.

Risks of neglecting Mexico’s southern border

Unfortunately, the Trump administration’s adversarial posture toward Mexico could actually endanger the ability to combat migration and drug flows into the United States, even with increased enforcement in the north.  Andres Manuel Lopez Obrador (AMLO), a leftist populist candidate for Mexico’s 2018 presidential elections, has recently taken the lead in polls by running as the anti-Trump.

AMLO has expressed strongly pro-immigration views, mainly in support of Mexicans residing in the US and fearing, but also in terms of welcoming more migrants from Central America into Mexico. In response to Trump’s initial DACA policy announced in September, AMLO responded, “in Mexico, the doors are open.”

Any continuation of hostile rhetoric from Trump could further strengthen AMLO’s accelerating support for the presidency in 2018. Additionally, the difficulties of the current NAFTA renegotiations and Donald Trump’s threats to exit the agreement altogether have even caused Mexico’s current political leadership to state that they wouldreconsider cooperation with the United States on security and migration issues if the US chooses to exit NAFTA.

Additionally, while the Trump administration has ramped up immigration enforcement and proposed additional security measures at the US southern border, it has also proposed sweeping cuts to international aid programs that will hinder Mexico’s ability to sustain its achievements in enforcing its southern border with Central America. As of this summer, the Trump administration still proposed a 39% reduction in support for Central America in fiscal year 2018.


Overall, effective deterrence of illegal drugs and immigrants entering the US will require some combination of enhanced enforcement at the US southern border, as well as aid to Mexico to effectively police its own southern border.

Mexico and the US remain strong partners in commerce and security, but any efforts by one or both sides to further antagonize political disagreements or by the US to cut transnational partnerships could severely jeopardize both countries’ abilities to achieve their shared problems in this arena.


Samuel Schofield is a Contributing Analyst at Global Risk Insights. As originally appears at: http://globalriskinsights.com/2017/11/mexicos-southern-border-immigration-consequences/

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

AMLO On The Rise: Trump Not Only Factor That Could Derail NAFTA

Representatives of Canada, Mexico and the United States recently concluded in a fourth round of negotiations to revise the North American Free Trade Agreement (NAFTA), created in 1994. Negotiations began in late summer in Washington, D.C. and negotiators have signaled that talks will likely continue into 2018. However, mid-2018 presidential elections in Mexico and congressional elections in the United States could have a greater impact on NAFTA’s future.  

President Donald J. Trump swept into office with very public criticisms of NAFTA and other trade deals. He has threatened to withdraw from NAFTA as recently as this month, even with negotiations underway. His grievances center on NAFTA being unfair to US workers, especially manufacturers and small businesses, as well as the current US trade deficit with Mexico, which stands at around $64 billion.

His administration has also made several demands that complicate negotiations, including raising the US-made auto parts requirement, from the current 62.5% to 85%. Additionally, they have proposed eliminating NAFTA’s Chapter 19 dispute settlement mechanism, which allows companies to appeal trade decisions by domestic courts through an independent panel. Canada and Mexico strongly oppose each of these demands.

Amid the rhetoric, it is easy to overlook the fact that political forces in the US and Mexico are likely to be at least as significant as Trump. Mexico has a general election in July 2018 and the United States has congressional elections in November of that year. These elections generate a range of political scenarios, some favorable, but some leading to more polarization between the US and Mexico.

US mid-term congressional elections

A unilateral, near-term decision by Trump to withdraw from NAFTA appears highly unlikely. President Trump’s grievances are shared by some labor unions and Democratic constituencies. However, many Republicans and trade associations traditionally support free trade from an ideological standpoint. In fact, an August poll by Livingston International found that only six percent of Americans believe the US should withdrawfrom the agreement, and only 13 percent favor a renegotiation. More importantly, seven of the top ten US states most dependent on NAFTA for commerce voted overwhelmingly for Donald Trump. North Dakota sends 82 percent of its exports to Canada; Texas and Arizona send 30% of their exports to Mexico. Additionally, NAFTA has created 5 million U.S. jobs that depend on free trade with Mexico. Consequently, squashing NAFTA could affect Trump’s voter base and threaten conservative majorities in Congress.

If Democrats obtained the majority in one or both chambers of Congress, they would be more favorable to NAFTA. A 2017 Gallup poll showed that 67% of Democrats say NAFTA has been positive for the US, compared to 22% of Republicans. The fear of Democrat electoral gains on the basis of popular dissatisfaction with NAFTA talks is also likely to hold Trump back from a sudden unilateral withdrawal.

Mexico presidential elections

Even if negotiating parties reach a new deal on NAFTA, Mexico’s presidential elections in 2018 pose a threat to NAFTA’s survival, or at least its long-term effectiveness. Mexico’s current president, Enrique Peña Nieto, supports NAFTA. However, he has a very low approval rating, to the point that he has decided not to seek another term. Furthermore, intense anger in the Mexican public toward Donald Trump’s statements on Mexico has elevated interest in the platform of leftist populist candidate Andres Manuel Lopez Obrador (AMLO). AMLO now holds a slight lead in polls for 2018, with 23% of voters indicating that they would vote for his MORENA party, ahead of 20% stating support for the conservative National Action Party (PAN).

Complicating matters, former first lady, Margarita Zavala, announced on 6 October that she will consider running as an independent candidate, breaking from her conservative National Action Party (PAN). Zavala based her decision on PAN’s May announcement that it would create an alliance with the left-wing Democratic Revolutionary Party (PRD), aimed at defeating Peña Nieto’s party. Zavala’s independent run could dilute conservative votes and strengthen AMLO’s chances.

What if AMLO wins?

An AMLO win would likely exacerbate the caustic rhetoric between the two countries. Essentially, it would pit two outspoken populists from opposite ends of the political spectrum against each other. AMLO has proposed ending the NAFTA “straitjacket” and Mexico’s “subordination” to the United States. He has also threatened to reverse reforms that opened up Mexico’s petroleum sector to private investment, suggesting a willingness to renationalize the industry. AMLO is unlikely to honor any NAFTA renegotiated agreement reached before his taking office. This, combined with Trump’s lukewarm personal commitment to sustaining NAFTA, would place its future at risk in the longer term.

Center-right victory

The most favorable scenario for NAFTA would be that parties reach a renegotiated deal in early 2018, followed by a win by virtually any of the three primary contenders to AMLO: the conservative PAN-PRD coalition, the independent Zavala, or the incumbent PRD party. The dilemma is that Peña Nieto’s low approval, combined with AMLO’s rising popularity, leaves little room for error in marketing and implementing the new agreement. Since a deal will likely be reached while Peña Nieto remains president, he must sell a renegotiated deal acceptable to a plurality of voters in his country that have largely tuned him out, and on behalf of a political party polling poorly without a strong candidate to succeed him. Furthermore, the PAN-PRD coalition and independent Zavala will likely advocate for NAFTA, but must also distinguish themselves from the unpopular Peña Nieto, a difficult balance.

Regardless of AMLO’s threats, a full Mexican exit from NAFTA remains highly unlikely, as the United States purchases 80% of Mexico’s exports. Any actions that jeopardize that revenue stream could result in economic woes for Mexico and public backlash. Additionally, the Mexican Peso has performed well this year against the US Dollar. Theoretically, a stronger Peso would enable Mexican firms to afford more US goods, thereby chipping away at the trade deficit. In the end, a renegotiated NAFTA with minimal alterations remains the most likely short-term scenario, but the 2018 elections in the US and Mexico will determine its long-term fate.


Samuel Schofield is a Contributing Analyst at Global Risk Insights. As originally appears at: http://globalriskinsights.com/2017/10/nafta-policital-forces-us-mexico/

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

4 Mexico Stocks Hit Hardest By Souring NAFTA Negotiations

Peso plunges on NAFTA Negotiations

Mexico continues to struggle under US President Donald Trump’s uncertain protectionist policies. The Trump administration is contemplating big changes to the North American Free Trade Agreement (NAFTA) that could have a serious impact Mexico’s economy.

Concerns over the ongoing fourth round of NAFTA negotiations have hit the Mexican peso, driving it to five-month lows last week. In the last six months, the Peso has plunged nearly 6%, making it the worst performing emerging market currency in the period.

Bank of America Merrill Lynch strategists expressed pessimism over the Mexican peso, expecting it to decline further, “We do not expect the NAFTA renegotiations to be smooth. We expect investment to decrease while volatility could pick up,” they wrote in a report. “The high level of rates will start to play against economic growth. Positioning remains heavy in Mexico.”

Impact on ETFs and indices

Mexican stock markets have also struggled through the year as Mexican companies feel the heat over a decline in exports. The iShares MSCI Mexico ETF (EWW) is down 6.8% over the last one month, while the benchmark IPC Index has lost 2% in value.

Moody’s forecasts Mexico’s GDP could decline by 4% if the NAFTA pact is terminated. Even though this decline is lower than the 6.5% decline in GDP during the 2009 financial crisis, it would lead to a “severe confidence shock” for the broader economy.

Barclays expects the cost of manufacturing would rise by 10-12% in Mexico due to added tariffs if NAFTA is revoked.

Mexico’s exports to the United States make up nearly 25% of its GDP, resulting in considerable risks for export-oriented enterprises in the event that NAFTA uprooted. Mexico is the third largest trading partner for the United States, just behind China and Canada. In 2016, US imported goods worth $294 billion.

Vehicles make up nearly 24% of total exports from Mexico, while electrical equipment, machinery including computers, and mineral fuels make up 20%, 16.5% and 4.8% of exports respectively. These sectors will be hit hardest in case tariffs are imposed on imports from Mexico.

Stocks hit worst and why

Large export-oriented corporations are most at risk to the potential implementation of trade barriers by the United States. This includes large companies like Alfa Sab Mexico, Gentera SAB, Empresas ICA and Mexichem SAB.

Amidst ongoing NAFTA negotiations, in the last one-month, shares of these companies have tanked 25%, 18%, 17% and 16% respectively.

1.    Alfa S.A.B. de C.V

Alfa Group is a Mexican conglomerate with diversified businesses ranging from petrochemicals, auto components, FMCG, oil & natural gas and IT/telecom services. The company is the world’s largest producer of engine blocks and cylinder heads for automakers.

Alfa operates in 21 countries across the world. The company operates under five major business heads Alpek, the petrochemical company; Nemak, the aluminum auto components company; Sigma Alimentos, the refrigerated foods company; Alestra, the IT & telecom company; and Newpek, the oil and natural gas extraction company.

In 2016, Alfa group generated nearly 24% of its revenues from the United States, thereby putting it at significant risks to the withdrawal of the NAFTA pact.

Alfa Group is currently listed on the Mexican Stock Exchange and the Berlin Stock Exchange with tickers ALFAA.MX and G4L.BE. The company’s shares are also listed on US OTC Markets with ticker ALFFF. Furthermore, the company is a constituent of the Mexican benchmark index IPC and leading S&P and MSCI Indices tracking Latin American securities. In the last month, shares of the company have declined nearly 26% making it the worst performer among its peers. YTD in 2017, shares of Alfa Group lost 14% in value.

2.    Gentera SAB

Gentera SAB, earlier known as Compartamos SAB de CV, is a Mexico based financial institution engaged in the business of providing banking and credit services to low-income individuals and communal banks.

The company operates in Mexico, the United States, Guatemala and Peru, through its various subsidiaries: Compartamos Banco, a micro-financing bank; Yastas, a network of affiliated merchants that provide payments and financial transactions, Pagos Intermex the payment of family remittances company and Aterna, an intermediary between the distribution channels and the insurance industry.

Gentera is currently listed on the Mexican Stock Exchange with ticker GENTERA.MX and on US OTC Markets with ticker CMPRF. The company is also a constituent of the Mexican benchmark index IPC and leading S&P and MSCI Indices tracking Latin America securities. In last month, shares of the company have declined nearly 18%. YTD in 2017, shares of Gentera lost 17% in value.

3.    Empresas Ica

Empresas ICA is a holding company engaged in civil and industrial construction, real estate and home development, and operates infrastructure facilities, including airports, toll roads, and water treatment systems. The Company operates in five segments: civil construction, industrial construction, concessions, airports, and corporate and others.

Empresas has a significant presence in Mexico, Spain, United States as well as other Latin American countries.

In 2016, the company generated 15% of its revenues from the United States, its largest market outside of Mexico, thereby exposing it to risks in case of termination of the NAFTA agreement.

Empresas is currently listed on the Mexican Stock Exchange with ticker ICA.MX. The company is also a constituent of the Mexican benchmark index IPC and leading S&P and MSCI Indices tracking Latin America securities. In the last month, shares of the company have declined nearly 17%. YTD in 2017, shares of Empresas have lost 84% in value.

4.    Mexichem Sab

Mexican Sab is one of the largest chemical and petrochemical companies in Mexico. The company has a diversified product portfolio ranging from telecom, infrastructure, housing, drinking and water in countries like Mexico, the USA, Europe, Asia, Africa (South Africa), Middle East (Oman), and Latin America.

Mexichem operates under the following business heads: Vinyl, which is involved in the extraction of chlorine, caustic soda and chlorinated derivatives; Fluor, which is focused on the extraction of fluorite, as well as production of hydrofluoric acid and cooling gases; Fluent, which includes the manufacture of pipes and fittings made of PVC, polyethylene and polypropylene, as well as geo-synthetic tubes and connectors, and Energy, which comprises power cogeneration for internal and third-party consumption. The company operates through various subsidiaries across the globe.

In 2016, Mexichem generated nearly 16% of its revenues from the United States, thereby putting it at significant risk to a withdrawal of the NAFTA pact.

Mexichem has been listed on the Mexican Stock Exchange for the past 30 years with ticker MEXCHEM.MX. The company is also a constituent of the Mexican benchmark index IPC and leading S&P and MSCI Indices tracking Latin America securities. In the last month, shares of the company have declined nearly 16%. YTD in 2017, shares of Mexichem have appreciated 9.2%.

Negotiations Over NAFTA Are Weighing On Mexico’s Currency And Bonds

Mexico has been an anomaly in Latin America when it comes to monetary policy this year. All its major peers – Brazil, Peru, Chile, and Colombia – have slashed their key rates in YTD 2017. On the other hand, Banco de Mexico has been hiking its Official Overnight Rate as shown by the graph below.

At 7%, the rate is at its highest since early 2009. The central bank had to continue increasing the overnight rate in order to combat inflation which has itself reached a level not seen since the end of 2008.

The Mexican peso was one of the factors putting pressure on inflation.

As shown in the graph above, the currency has had quite an eventful one year. Its weakness against the dollar post the US Presidential election in November last year, which bottomed out on the eve of the inauguration of President Trump, put considerable pressure on consumer prices in Mexico.

The peso, which had declined nearly 6% against the greenback by January 19, later reversed course and rose 15.7% by mid-July, thus taking some pressure off inflation.

Hopes of a rate cut and impact on bonds

The Banco de Mexico last raised its overnight rate in June 2017 and had indicated the action may mark the last step in the rate hiking cycle. Its hawkish stance on inflation may be paying off with consumer prices declining for September as shown by the graph below.

But even after the small dip, inflation remains much higher than the central bank’s target range of 3%, plus or minus one percentage point. However, there are other concerns.

Negotiations over North American Free Trade Agreement (NAFTA) have been a big hurdle in the path of a rate cut. Recent developments have hurt Mexican financial assets across the board including its currency and bonds, as shown in the graph below.

The hawkish stance of the US Federal Reserve is another problem. In the past, Banco de Mexico has raised rates in sync with the US central bank in order keep local currency-denominated bonds attractive. Given that its rate tightening cycle may be at an end, further rate hikes by the US could reduce the appeal of Mexican bonds.

Had it not been for these issues Mexico’s central bank would have been in a position to effect a rate cut, given their confidence that inflation would continue to fall closer to their target in 2018.

If outgoing governor Agustín Carstens deems fit, he can push for a rate cut before his tenure at the helm of the central bank finishes in November.

At this juncture, odds seem to favor a status quo on policy rates. However, if a rate cut is effected, though it will dent bond yields in Mexico, it will help to anchor inflation expectations and can provide a leg up to the economy. Renewed confidence in the economy can keep Mexican bonds in play for some time before an easing cycle is firmly in place.

Facebook’s Future Depends On Asia Pacific, Now Accounting For Over 50% Of Growth

Developing countries now make up 70% of Facebook’s active users

Facebook (FB) is seeing strong growth opportunities in emerging market countries (EEM) in the Asia Pacific (AAXJ) and Latin America (ILF). Six years ago, 60% of Facebook’s user base came from developed countries like the US (SPY), Canada and Europe (EZU), but as Internet penetration in emerging markets grew, this landscape has undergone a gradual shift. In Q217, approximately 29% of Facebook’s 2 million monthly active users (MAU) were from the US, Canada and Europe while developing markets make up nearly 71% of the company’s monthly active users.

In Q2 2017, average revenue per user (ARPU) for Rest of World (excluding Europe, APAC, US and Canada) and Asia Pacific grew 55% and 53% to $954 million and $1.6 billion as these regions benefitted from particularly strong advertiser demand.

Meanwhile, Daily Active Users (DAUs) for these regions grew 18% and 30% respectively year over year, while that in North America and Europe grew merely 5% and 8% respectively.

In terms of revenues, US, Canada, and Europe still made up nearly 72% of the company’s total earnings of $9.3 billion for the second quarter, but in the longer term, this could change too.

Charlie Wilson, managing director at Thornburg Investment Management Inc. recently stated, “From a monetization perspective it’s still dominantly the U.S. but from a long-term opportunity perspective it’s definitely emerging-markets.”

Chris Cox, product chief at Facebook believes emerging countries like Indonesia, India, Thailand and Myanmar are paving the way ahead for the company. “The firm has taken a number of steps to expand internet connectivity and enhance user experience in these countries. Facebook launched its Internet.org program to extend web access in emerging markets through a mobile app,” he stated.

Facebook has introduced new features like “For Sale Groups” after studying usage trends in emerging markets. For Sale Groups emerged after Facebook engineers found users in Indonesia conducting commerce through groups.

Research firm eMarketer estimates Facebook’s users in India (INDA) will surpass the United States next year. Furthermore, it expects countries like India, Indonesia (EIDO), Mexico (EWW) and the Philippines (EPHE) to produce the highest user growth for Facebook through 2020. The company is expanding partnerships with key businesses in India, one of its key growth markets. Facebook’s India and South Asia head Umang Bedi mentioned, “We (India) are leading the charter for the emerging markets for Facebook. We are part of Asia Pacific, which is the fastest growing region in the world in terms of Facebook revenue and India is a strategic focus within the region.” India has nearly 166 million monthly active users, and is Facebook’s second largest market in terms of user base.

“India is the most critical and strategic market. Our business focus is three fold: grow the number of people who can connect on the platform, drive deep engagement by building relevant experiences and be valuable to our partners (brands),” Bedi continued. “Facebook is going to market with deep vertical focus”, he added. The firm is working in India with large companies like Samsung, Ford, Garnier, Mondelez, Durex and Ola to build marketing campaigns targeted for specific audiences.

Analyst Outlook: The Four Largest Telecommunications Stocks in Latin America

Moody’s outlook for the Latin American telecom industry

Mexican and Brazilian players primarily dominate the telecommunications sector in Latin America. However, experts remain bullish on the sector throughout the continent as smaller countries in the region are relatively untapped and have significant room for growth in terms of mobile and Internet penetration. Moody’s has a stable outlook for the Latin American telecom sector in 2017 as the industry continues to struggle with sluggish growth and cuts in capital investments. Moody’s forecasts EBITDA margins for the industry to decline from 35.6% in 2015 to 33% in 2018.  Marcos Schmidt, Moody’s Vice President stated, “Larger companies such as America Movil  (A2 negative), Telefonica Brasil (Ba1 negative) and Oi (Caa1 negative) will all see EBITDA minus capital spending grow at rates below the sector average, amid difficult economic conditions in Brazil, Peru and Chile, plus stiffer competition in Mexico that will slow growth and shrink margins.”

Moody’s has a stable outlook for the Latin American telecom sector in 2017 despite the industry’s recent sluggish growth and cuts in capital investments. Moody’s forecasts EBITDA margins for the industry to decline from 35.6% in 2015 to 33% in 2018.  Marcos Schmidt, Moody’s Vice President stated, “Larger companies such as America Movil  (A2 negative), Telefonica Brasil (Ba1 negative) and Oi (Caa1 negative) will all see EBITDA minus capital spending grow at rates below the sector average, amid difficult economic conditions in Brazil, Peru and Chile, plus stiffer competition in Mexico that will slow growth and shrink margins.”

The agency also expects margins of telecom companies to decline due to cut-throat competition between operators. Mexico’s telecom space has become extremely competitive ever since new regulations were introduced in 2014. Dominant players in the country are compelled to cut prices, putting profit margins under pressure. Meanwhile, “In Brazil, companies such as Telefonica Brasil and Claro that focus on the postpaid market will be more resilient than Oi and TIM, which concentrate more on Brazil’s quickly shrinking prepaid market,” Schmidt says

The four largest telecom markets in Latin America are currently Brazil, Mexico, Argentina and Chile.


Brazil is the largest telecom market in Latin America and the fifth largest globally. The telecommunications sector contributed nearly 4% to Brazil’s GDP last year while users of mobile services grew from 41 million last year to 80.6 million in August 2017. Currently, mobile internet in the form of 3G and 4G is accessible to 98.4% of the country’s population according to Telebrasil, Brazilian Telecommunications Association.

The Brazilian telecom market is primarily dominated by four large players – Spain’s Telefónica, Mexico’s América Móvil (AMX),  and Oi, controlled by Brazilian investors and Portugal and GVT.

In the last twelve months, the telecom market in Brazil has grown by 5.9% and is dominated by America Movil, Telefonica and Oi. The market leader America Movil added nearly 200,000 connections in the past one year, occupying 31% market share, while Telefonica and Oi command 27% and 23% of the market.

Spain’s Telefonica operates in Brazil as Telefónica Brasil and has branded its landline and mobile offering under Vivo. Mexico based América Móvil group operates as mobile operator Claro and cable TV services provider Net Servicos. Oi offers landline and mobile services under the Oi brand name. GVT is the country’s most successful alternative network provider, offering landline services only.


Mexico is the second largest telecom market in Latin America with 89 million users, representing nearly 70% of the population. The telecom sector contributes nearly 3.5% to the country’s GDP.

The local market is owned by three major players. América Móvil’s Telcel has 67% of mobile connections, while Telefónica-owned Movistar has 24%, and AT&T, after acquiring Iusacell and Nextel in early 2015, occupies 9% of the market. Since 2010, mobile operator market shares have remained largely unchanged in the country.


Argentina is of the most developed broadband markets in South America, second only to Chile. The telecom market in Argentina is primarily dominated by Telecom Argentina, Movistar, Claro, and Telecom Personal.  The local fixed-line industry is dominated Telecom Argentina (Telecom) and Telefonica de Argentina (TA) while the broadband market is occupied by Telefonica de Argentina, Telecom Argentina, and Grupo Clarin.


Chile’s broadband penetration is relatively high compared with other Latin American countries. In the past decade, Chile has benefited from solid GDP growth as larger Latin American economies have faltered. Currently, the country has one of the highest GDP per capita income, leading to high disposable income for telecom services.

Telefónica’s Movistar, Almendral’s Entel, and América Móvil’s Claro are the largest players in Chile, operating through Nextel Chile and VTR.

Telecom stocks to consider

Year to date, the MSCI World Telecom Index has surged 0.5%. Comparatively, the MSCI Brazil Telecom Index, MSCI Mexico Telecom Index, MSCI Argentina Telecom Index and the MSCI Emerging Markets Telecom Index have returned 23.5%, 48.2%,71% and 15.1% respectively.

Looking at ETFs, the iShares Latin America 40 ETF (ILF) invests 4.9% of its portfolio in Latin American telecom stocks while the iShares Global Telecom ETF (IXP) provides 2% exposure to Latin America telecom stocks. YTD, shares of these ETFs have returned 25.6% and 3.7% respectively.

The largest Latin American telecom stocks by market capitalization are America Movil, Telefonica Brasil, Tim Participacoes Sa, Telecom Argentina and Nortel Inversora.

Year to date, shares of these companies have returned 27.5%, 11.6%, 45.72%, 84.58% and 56.7% respectively.

The largest Latin American telecom providers by revenue are America Movil , Telefonica Brasil , Oi SA, Tim Participacoes SA, and Telecom Argentina S.A. In 2016, these companies generated revenues of $52.3 billion, $12.3 billion, $7.5 billion, $4.5 billion and $3.6 billion respectively.

America Movil

America Movil (MV9.F)(AMOV)(AMXL.MX) is the fourth largest mobile network provider in the world and a Forbes Global 2000 company. Controlled by Mexican billionaire Carlos Slim, it provides 363.5 million access lines, including 280.6 million mobile subscribers worldwide.

In Mexico, its subsidiary Telcel is the largest mobile operator commanding a market share in excess of 70%. The company operates in Jamaica, the Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, Peru, Argentina, Uruguay, Chile, Paraguay, Puerto Rico, Colombia and Ecuador through its Claro subsidiary while in Brazil it operates through Embratel and Claro. In the United States, it operates through its subsidiary TracFone. It is among the largest telecom providers in the United States. The company also own 30% of KPN, the Netherlands based telecom company and 60% of Telekom Austria Group. In 2007, America Movil acquired Jamaican telecom company Oceanic Digital. América Móvil acquired 100% of Jamaican mobile operator Oceanic Digital, under the brand name MiPhone in August 2007. On November 15, 2005, the company signed an international pact with Bridge Alliance to jointly deliver various international services.

America Movil is the largest Mexican company by revenues with annual sales of $52.3 billion in 2016. In 2016, the company owned assets of $73 billion, making it the largest company in Mexico by assets.

The company trades on the Mexican, New York and Frankfurt stock exchanges (MV9.F)(AMOV)(AMXL.MX). With a market value of over $63 billion, the company is currently the most valuable company in Mexico, more than the next three most valuable companies combined.

Telefonica Brasil

Telefonica Brasil (VIV)(VIVT3S.SA) is the Brazilian subsidiary of the Spanish telecom giant Telefónica. The company entered Brazil in 1998 while privatization of state owned Brazilian telecom company Telebras was taking place. Telefónica began their operations in Brazil under the brand Vivo in 2003 through a joint venture with Portugal Telecom. In 2015, Telefónica Brasil acquired GVT to become the largest telecom operator in Brazil.

As at June 2017, Telefonica served nearly 97.6 million customers in Brazil. The company generated revenues of $12.3 billion in 2016, pitting it against the largest global telecom players.


Oi (OIBR4.SA)(OIBR-C) is Brazil’s leading telecommunications service provider, and is one of the largest telecom companies in South America in terms of subscribers and revenues. The company operates through its subsidiaries Telemar and Brasil Telecom.

In June 2016, the company filed for a $19 billion bankruptcy protection, the largest so far in Brazil. The in-court reorganization has been slowed by ongoing disputes between creditors and shareholders.

In 2016, the company serviced 63.6 million customers and generated $1.1 billion in revenues. The company trades on the Brazilian and New York stock exchanges and has gained 59% in 2017 so far.

Tim Participacoes SA

Tim Brasil is the Brazilian arm of Italy based telecom provider Telecom Italia Mobile (TI). The company has nearly 61.3 million customers in Brazil and is the first mobile company to service all states in the country.

In the last twelve months, TIM was the fastest growing broadband operator in the country growing its subscriber base by 21% to 378,446. TIM is the fifth largest broadband player in Brazil with a market share of 1%. In 2016, Tim generated revenues of $8.8 billion, third highest among Latin American telecom companies.

Shares of the company are listed on BM&F Bovespa (TIMP3.SA) and NYSE exchanges (TSU) and have gained 46% in 2017 so far.

Analysts opinion

Analysts are wary of telecom companies in Latin America’s largest economies – Brazil and Mexico – as they struggle with political and economic uncertainty.

Recently, BTIG initiated coverage on Latin America’s largest telecom company America Movil with a neutral rating raising doubts in its ability to manage its shareholder’s returns along with its massive debt burden. However, the research house is bullish on Telefonica Brasil.

Analyst Walter Piecyk mentioned in a note to investors, “The bankruptcy filing of Oi closes another chapter in the development of the wireless market in Brazil and could mark a turning point for the industry. Investors have shown little interest in the Brazilian wireless industry in recent years given the economic and political turmoil combined with the inability of the wireless industry to consolidate … Telefonica Brasil, which uses the Vivo brand in Brasil, remains the safest way to play Brasil telecoms given its diversified business, synergy opportunity and strong management team. Its stock has materially outperformed TIM Brasil, resulting in what now might be an unwarranted valuation premium …

America Movil’s total enterprise Value is slightly over 5x our 2017 EBITDA estimate in a year that we expect no growth. The stock price also implies a free cash flow yield of 7%, but primarily because of the more than 20% cut in capital investment expected this year, which we believe could have longer term negative implications for revenue growth potential. America Movil sometimes issues special dividends, but given the lack of free cash flow growth at the company and share repurchase we estimate a dividend yield of less than 3%this year and next,” the note continued.

Shares of America Movil have received 4 buy ratings, 2 sell ratings and 11 hold ratings. In comparison, Telefonica Brasil has received 13 buy ratings and merely 4 hold ratings. Telefonica Brasil has received no sell ratings. TIM has received 4 buy ratings, 2 sell ratings and 11 hold ratings. Analysts are most bearish on shares of Oi after the company filed for bankruptcy protection last year. The company has received 2 hold ratings and 3 sell ratings.

Valuations within the Latam telecom sector are stretched with average one-year forward PE ratio of 23x.

Nortel Inversora (NTL)(NORT6.BA), Cnt Telefonica Del Sur (TELSUR.CI) and Telecom Argentina (TEO) are the most attractively priced telecom stocks based on their cheap valuations. These stocks have one year forward PEs of 3.4x, 7.4x and 17x, and are trading at the steepest discount to their peers. Meanwhile Almendral Sa, Empresa Nacional De Telecom (ICA) and Atom Participacoes (ATOM3.SA) are expensive stocks.

US Treasuries: Why China and India Is Buying, But Japan Is Not

China and Japan account for a combined 36% of all US Treasuries owned by foreign countries, according to the June 2017 data released in the August edition of the Treasury International Capital (TIC) report.

However, while China has mostly been adding Treasuries over the past seven months, Japan has been cautious and has actually reduced its holdings. Meanwhile, Mexico has been selling Treasuries, but India and South Korea have been lapping them up.

The graph below displays a relative analysis of how US Treasuries holdings have changed for these five nations on a monthly basis over the past three years.

Why is China buying, but Japan is not?

China sold US Treasuries aggressively last year in order to defend the yuan which was in decline during a campaign to restrain capital flight. Once the situation stabilized, China resumed its Treasuries purchases.

Even after purchases in recent months, its level of holdings is still lower than the September 2016 level – a month before it lost its top position as the largest investor in US Treasuries to Japan.

The resumption in buying indicates the confidence China has in the stability of its currency and in its economy. Further, the country seems inclined to continue adding to its holdings.

On the other hand, Japan has been cautious about buying Treasuries due to the rising interest rate environment in the US. It does not want to buy at a time when yields are expected to continue to rise.

The case of India and Mexico

The Reserve Bank of India has been on a US bond buying spree, with its holdings for June at an all-time high. Though the Indian central bank, alike Japan, also expects a rise in yields on these securities, the sharp increase in holdings indicate that it expects the rise to be moderate.

India’s high forex reserves have facilitated these bond purchases. If yields on US bonds decline, it would not only benefit the investment the country has made into them, it will also enhance the appeal of Indian bonds as the spread between them and their US counterparts would increase, thus making the former more attractive.

The case of Mexico is different. The country has been selling bonds since the time President Trump announced his candidacy back in 2015. His less than amicable views on the country triggered the sale, and Mexico then continued reducing its holdings after the Republican candidate became a nominee, and then, eventually the President.


Emerging markets have differing views and assessments on the path of US Treasury yields. A quick or unanticipated climb in yields, which could also result from increased inflation expectations, would be detrimental to those countries ramping up their holdings.

On the other hand, a more gentle increase would be beneficial to such nations, depending on the tenor they have invested in. For instance, a flatter US yield curve would help those nations who have invested in the longer end of the curve as yields on those bonds would decline, thus resulting in a handsome payday for those central banks which had invested at higher yield levels and intend to sell.

Mexico Gives Thumbs Down To US Treasuries, While These Emerging Markets Are Buying

The August edition of the Treasury International Capital (TIC) report released by the US Treasury Department, which contained data until June, was notable for one aspect in particular: China overtook Japan as the largest foreign investor in US Treasuries after a gap of eight months.

The Asian major had consistently been the largest foreign investor in US Treasuries before it lost the position to Japan in October 2016, as shown by the graph below. In the two year period plotted in the graph, China’s holdings had reached its nadir in November last year.

From June 2015 until November 2016, there were only three months in which the country added to its stock of US Treasuries. The decline over this period was equivalent to an annualized 12% pace. The sharpest decline was also seen in November, when the country sold securities worth $66 billion compared to the previous month.

From that point, except for January this year, China has been consistently adding to its stockpile, with the largest monthly addition of $44 billion seen in June.

However, this was not the only interesting trend in the report.

Trend among emerging markets

The graph below plots the holders of US Treasuries by country except China which had emerged most consistently in the top five over the last five years until the holdings data for June 2017. South Korea was excluded from this graph as Mexico had figured in the top five for three out of the five years considered in this analysis.

We’ve calculated the annualized rates of change in holdings over the past five years for these countries.

Brazil and Taiwan have seen nearly the same pace of change, but in opposite directions. While Brazil has seen its stockpile increase by a 1% annualized pace, Taiwan has seen a decrease at the same rate.

Mexico presents an interesting case. In terms of pace, it has seen the sharpest decline in its holdings at 9.7% annually. Its holdings of US Treasuries had peaked at $87.4 billion in April 2015 and now stand depleted to $32.3 billion – its lowest in these five years.

Russia has also offloaded US Treasuries quite sharply at an annual pace of 8% over the period. However, the difference between Mexico and Russia is that while Mexico had seen a peak in April 2015, Russia’s holdings had seen their nadir in the same month. Further, while Mexico continues to sell, Russia has been buying.

India has been piling in on US Treasuries of late. Its annual pace over the past five years stands at a staggering 17%. South Korea, has been adding to its US Treasuries holdings as well, at a similar pace of 16.8%.

In the next article, let’s look at what these holdings mean for emerging markets and what they may indicate for the future.

5 Mexican ADRs With Attractive Valuations Since Trump Entered The White House

Mexican ADRs are commanding increased investor interest

Mexico’s stock market has been commanding increased investor interest ever since President Donald Trump set foot in the White House. His protectionist pledges against Mexico have weighed down the Mexican peso sharply against the US dollar (UUP). Mexican equities on the local stock exchange, as well as listed ADRs trading on the US stock market (SPY) (IWM), had taken a hit. The Mexican equity-tracking iShares MSCI Mexico Capped ETF (EWW) touched its 5-year low ($42.64 a share) on January 16 this year. The Mexico Fund, Inc. (MXF) and the Mexico Equity & Income Fund Inc. (MXE) are other US-listed funds providing exposure to Mexican equity.

Top 5 Mexican ADRs

ADR Ticker Name Sector – Industry P/E P/B YTD Return%
BSMX Grupo Financiero Santander Mexico SAB de Financials- Bank 13.81 2.21 47.25
CX Cemex SAB de CV Materials- Construction 13.83 1.48 20.79


Mexichem SAB de CV Materials- Chemical 14.69 2.01 20.25
BRGGF Banregio Grupo Financiero SAB de CV Financials- Bank 14.53 2.74 16.32


Grupo Financiero Banorte SAB de CV Financials- Bank 17.18 2.54 45.87
Note: Returns and ratios relate to data as of August 10, 2017


Stock market recovering, economic indicators favorable

However, the markets appear to have recovered from their January abyss now; the EWW is up 30% since January 16 (as of August 10). Moreover, economic indicators seem to be putting Mexico in a favorable light; GDP growth gradually gaining, unemployment is low , inflation has been rising fuelled by consumer spending, and the country’s balance of trade position is substantially better now.

However, Mexican equity still has a long way to go before it sees its market recovering to levels seen before the oil price plunge in mid-2014. The price of oil matters to Mexico as oil revenues make up close to 10% of the Latin American (ILF) economy’s export earnings. The EWW had seen trading in $65-$70/share range until the third quarter of 2014.

US investors seeking bargain opportunities

Now, while Mexican equities take their time to gain pace as they tread northward, long-term investors are seeking out bargain opportunities. For US investors, there are a lot of Mexican companies which have their ADRs trading on the US exchanges. We filtered the list for you, to arrive at the top 5 Mexican ADRs currently trading at the most attractive valuations on the US exchanges. These include 2 companies from the materials sector and 3 from the financial sector (see table above).

Mexican Banking Boom: 3 ADRs Offering High Dividend Yields at Low Price Multiples

Mexico financial sector equity looks attractive from a valuation perspective

Mexican financial sector equities that are part of the iShares MSCI Mexico Capped ETF (EWW) has returned about 33.3% YTD (as of August 10). With YTD returns equivalent to 48.4%, 47.2%, and 45.8% respectively, stocks of Grupo Fin Interacciones, Grupo Financiero Santander (BSMX), and Grupo Financiero Banorte (GBOOF) (GBOOY), are among the top performing stocks within Mexico financial sector equity. Investors in the sector enjoy a healthy dividend yield of 4.5% and a relatively lower price multiple of 2.32 P/B for the sector.

The chart above shows the forward valuations for the MSCI Mexico Financials Index as of August 10. The rising forward EPS trend line clearly indicates a higher earning potential for the sector. However, price expectations, as indicated by the forward price-to-book ratio, are also on the rise. We took a closer look at stocks within the financial sector in Mexico and identified 3 stocks in particular with US-traded ADRs, which enjoy overall favorable valuations. (Returns and performance figures relate to data as of August 10, 2017)

  1. Grupo Financiero Santander México, S.A.B. de C.V. (BSMX)

Grupo Financiero Santander México, S.A.B. de C.V. provides a range of financial and related services to clients ranging from individuals to corporations to government institutions. The Mexican banking group is a subsidiary of Spanish bank Banco Santander.

The bank’s ADR is trading on the NYSE under the symbol BSMX. On a year-to-date basis, the ADR had returned 47.25% as of August 10. The stock trades at an attractive P/B of 2.21 as compared to the peer average of 2.32. Additionally, the stock offers an attractive dividend yield of 7.02%.

  1. Banregio Grupo Financiero, S.A.B de C.V. (BRGGF)

Operating as BanRegio, Banregio Grupo Financiero is a regional bank offering financial and investment products and services in Mexico. The bank’s ADR trades on the NYSE’s OTC market under the symbol BRGGF. On a year-to-date basis, the ADR had returned 16.32% as of August 10. The stock trades at an attractive P/B of 2.74.

  1. Grupo Financiero Banorte, S.A.B. de C.V. (GBOOF) (GBOOY)

Grupo Financiero Banorte or Banorte is a Mexican banking and financial services holding company. The bank’s ADR trades on the NYSE’s OTC market under the symbols GBOOF and GBOOY. On a year-to-date basis, the ADR had returned a whopping 45.87% as of August 10th. The stock trades at an attractive P/B of 2.54. The stock has 73.9% BUY recommendations from rating analysts.

Latin American Bonds: Why High Yields In Brazil Are Failing to Stoke Interest

Two markets stand out when searching for yields in Latin America: Brazil and Argentina. However, unlike other countries from Asia and Eastern Europe that we’ve analyzed in earlier parts of this series, the high yields on Brazilian and Argentine bonds may not be attractive enough for investors by some standards.

The graph below plots yields on 10-year bonds from Brazil and Mexico. The former should be stoking much higher investor interest than the latter due to returns offered. However, that’s not the case.

Mexico remains in play

Bloomberg recently reported the views of several major Wall Street firms on Mexican bonds. Goldman Sachs was said to have reduced exposure to emerging markets, though it remains overweight on Mexico. Further, despite the fact that Citigroup thinks emerging market credit is “fully valued,” it continues to be overweight on Mexico. Morgan Stanley has similar views and is positive on dollar-denominated sovereign bonds from the country.

Corruption, politics, and monetary policy hurting Brazilian bonds

Macro-economically, 2017 was supposed to be the turnaround year for Brazil. However, the best performing equity emerging market of 2016 has found itself bogged down by corruption scandals which has given rise to a heightened perception of political risk.

President Michel Temer himself is facing graft charges and there’s concern of another head of government having to undergo impeachment after former president Dilma Rousseff was impeached barely a year ago. Apart from elevated risk, this could also potentially throw the reform cycle out of gear – an unsavory development for investors.

Meanwhile, Luiz Inácio Lula da Silva, also a former president, was recently sentenced to nine-and-a-half years of prison on corruption charges.

Another reason why Brazil is currently suffering from a lack of appeal is due to monetary policy. There are views that the interest rate reduction cycle will stop this year. This could lead to little room for compression of yield spreads with similar maturity US Treasuries, which would mean less scope for further profits for those who had invested in Brazilian bonds at high yields.

The Brazilian real (BRL) has been almost unchanged in YTD 2017. Weakening of the currency could make local currency denominated bonds attractive, though the political risk factor can be expected to outweigh this. On the other hand, if Mexico’s central bank cuts rates, it would weaken the peso. Given investor affinity towards the country bonds already in place, their appeal could heighten even more.

So far, we have yet to address Argentine bonds. The local currency (ARS) is part of the reason, as shown from the graph above displaying the sharp weakness experienced by the Argentine peso, thus making local currency bonds unattractive.

But there’s another reason which applies to the broader emerging markets universe as well. Let’s look at this in the next article of the series.