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  • CMO - Mexico Cheap For A Reason

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    Investment report

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    20180319 CMO - Mexico Cheap for a Reason

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    Investment report

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    © All Rights Reserved
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    22 views7 pages

    CMO - Mexico Cheap For A Reason

    Uploaded by

    RCS_CFA
    Investment report

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    of 7
    HIEF INVESTMENT OFFICE Capital Market Outlook MARCH 19, 2018 Mires MACRO STRATEGY The transition to more pro-growth fiscal and regulatory policy, a secular trend change in interest rates and market leadership from the technology sector are key trends we see Continuing over the intermediate to longer term. Here, we examine some historical parallels between the current cycle ‘and the 1990s’ cycle that support our outlook for continued solid economic growth, GLOBAL MARKET VIEW We see a number of gale forces bending but not breaking the current rally in US. equities this year. We believe we are ina bamboo market. THOUGHT OF THE WEEK ‘The potential for Mexican equities as a solid value play exists, Positive resolutions in North American Free Trade ‘Agreement (NAFTA) negotiations and clarity created by July's presidential election would realize this value in our view. However, we remain cautious given high uncertainty PORTFOLIO CONSIDERATIONS One of the trends that has not materialized in the equity ‘markets, particularly in the US, has been outperfornance ‘of value over growth on a style basis. Growth has handily ‘outperformed especially since the beginning of 2017 largely due to the dominant positioning of information technology stocks and the pressure from deep value equities on value indices Waeuus DEJA VU ALL OVER AGAIN, PART Il: THE 19905 GWIM Chief Investment Office Macro Strategy Team ‘As we discussed in last week's repor, there are similarities between the current cycle and the 1950s and 1980s expansions, as well as differences that give the current cycle distinct features, One important characteristic of the current ‘expansion is that it followed the most severe financial crisis since the 1930s. The unwinding of excesses in household mortgage-debt-related sectors, housing and banking, hampered the typical early-cycle recovery of these sectors, restraining the expansion in the process, similar to what happened in the 1990s expansion. A number of other aspects of the 1990s expansion offer additional insights into how the ‘current expansion is unfolding IF the current expansion lasts past June 2019, it will become the longest in US. history, surpassing the 120-month long 1990s expansion. Some of the shared features of the 1990s and today’s expansion help account for their unusual longevity These include: (1) low inflation; (2) a greater reliance on equity as opposed to debt financing for growth; (3) technology sector leadership; and (4) a late-cycle pickup in capital spending and productivity The long downtrend in inflation that began in the early 1980s, with an annual Consumer Price Index (CPI) peak just above 13% in 1980 to consistently less than 3% in the late 1990s, allowed the Federal Reserve (the Fed) to maintain a more accommodative policy even as the unemployment rate fell coward 4%, Fed Chair Alan Greenspan kept policy accommodative in the late 1990s even though unemployment was low, and wage growth was accelerating, This gave extra life to the 1990s expansion. Simitarly low inflation today has kept the Fed stimulative despite low unemployment in an effort to boost inflation closer to its long-term target of 2%. Most recessions begin after the Fed has reduced ‘accommadation by tightening financial conditions and inverting the yield curve. Currently the relevant yield curve spread between the Federal funds rate and the ten-year ‘lynch Wath Management hes ave products and series fee Mey, Pace, Foam & Sat [MLPr8) a epsteredbroer- dealer and Member UPC, ae te subsides of Bak of Ane Cnpvation BOA oe vest vs {3 Merrill Lynch hank of Aenea Conporaton ‘Are Not FDIC insured “Are Not Bonk Guranteet May Love Valve Ween Treasury note is around historically normal levels, or even a bit, higher, suggesting that policy remains accommodative. Excessive borrowing or leverage are often constraints (on economic expansions as consumers and businesses increasingly rely on loans late in the cycle to fund big- ticket expenditures like houses, cars and capital equipment. Historically reliance on debt finance gets one or two standard

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