Monday, May 10, 2021

Small Shift In Our Core Allocation...

FYI We made a modest core allocation shift this morning in portfolios large enough to hold our remaining position in FXY (Japanese Yen). The move speaks more about the relative attractiveness of Mexican equities than it does about any serious lack thereof for the yen. 

It makes for a tax-efficient (in non-retirement accounts) rotation as well.

This results in a ~10% of our emerging markets' weighting to Mexican equities (EWW). Which amounts to just over 1% of the total portfolio.

Here's from our internal notes:
Exiting our remaining small Japanese Yen position and entering Mexican equities. I've been considering StoneX's chief macro analyst Vincent Deluard's bullish case for the past few weeks -- which comports with my own overall thesis on Mexico (where I was focused mostly on the commodity/China aspects) -- and I essentially agree.
Here it is in a nutshell:

3 major parts of the 2021 macro narrative supporting Mexico’s economy/currency/equities:

1. U.S. consumer is turbocharged
2. Steeper yield curves
3. Reflation/rally across commodity complex

Mexico is at the intersection of all 3.

1. Mexico is very tied to the US consumer. Mexican exports to the U.S. are 50% of GDP. Remittances will remain very strong as the U.S. economy opens up - already up 20% this year -- will help the Mexican economy, as well as the currency as the recipient families will sell the dollar to buy the peso.

2. The largest holdings in the Mexican index are energy and banks. Banks do better when yield curves are steeper.

3. The Mexican economy is commodity-centric. Oil, silver, ag, etc…

Gets all these with a very cheap currency and first trade surplus in 30 years.

Also: Mexico is bound to benefit from tensions with China, as well as China’s shift to consumption and a stronger yuan. I.e., look for Mexico to receive capital investment as production relocates away from China. 

Transportation costs, along with very cheap labor, makes Mexico a cheaper place to manufacture for the U.S. vs China.

FXY (yen) is strategically an easy funding source for this position, as, given its currently low portfolio weighting, its effectiveness as an overall hedge has become marginal at this point.

Note: The above reflects changes we've made within our client portfolios. It is in no way to be construed as a recommendation to subscribers.

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