Why Donald Trump Could Be Mexico’s New Best Friend

One Million Dollars

The markets can be funny.

Sometimes, you can’t predict what will move the market.

You think the market will move due to one thing, only for it to move due to something else.

But who’d have thought that one man, not a central banker, not a president or prime minister, and not even an influential investor, could move one market so wildly.

But that’s what happened this week. It’s an interesting tale…

No prizes for guessing who we’re talking about. That’s right, Donald Trump.

As for his influence on the market, it may not be as obvious as you think. We’re not talking about influencing real estate prices, or stock market indices or valuations.

Trump’s influence is much bigger than that. He’s having an influence on the fortunes of an entire economy. And not the US either. Instead, it’s Mexico.

Here’s why…

A bigger influence than the current president

You’re probably familiar with the story.

If Donald Trump becomes US president, he says he’ll build a wall along the US and Mexican border. The aim is to keep out the tens of thousands of illegal immigrants who flood across the border each year.

Of course, there’s no guarantee Trump will build the wall if he wins. But that’s not important.

Of more importance is the effect Trump’s plan is having on Mexico’s economy, in an unexpected way.

Check out these charts. First, is a chart showing the relative opinion polling of each candidate. The blue line is for Hillary Clinton, the red line is for Donald Trump:

Source: Bloomberg
[Click to enlarge]

The next chart is of the Mexican peso against the US dollar:

Source: Bloomberg
[Click to enlarge]

You can see a clear and relevant correlation. As Donald Trump’s poll numbers have improved (red line in top chart), the value of the Mexican peso has fallen.

In July 2015, one Mexican peso would get you 6.4 US cents. Today, one Mexican peso will get you just 5.1 cents. That’s a fall of 16.3%.

It may not seem such a big deal, but it is. And ironically, it’s helping Mexico in a way that is sure to infuriate Mr Trump.

Best of friends?

Not only is Mr Trump angry about illegal immigrants, he’s angry about Mexico’s cheap labour and the jobs US companies are sending south of the border.

Yet, the market’s reaction to Trump’s plans is making it even more favourable for companies to ‘offshore’ jobs, and making it even cheaper for consumers to buy products from Mexico.

As we say, it’s funny how the market works. The markets see Trump as an enemy of Mexico. But as it turns out, in terms of Mexico’s exports, Mr Trump may turn out to be the best friend Mexico has right now.

That could of course all change in November. We’ll keep our eye on this. It’s all set up for an interesting few weeks.

Our investor pick for the AFL Grand Final

Closer to home, today is a public holiday in Victoria.

Why? Because tomorrow is the AFL Grand Final day.

We know. It doesn’t make sense. It’s another odd and unique Australian public holiday. It ranks up there with the Melbourne Cup holiday, and the Queen’s Birthday holiday.

But heck, who’s going to knock back an extra day off each year? We’re not.

Even so, it got us thinking. Can Grand Finals of the past give us any clue about the direction of the market in the future?

It’s nonsense, but for fun, let’s take a look anyway…

We’ll be honest. We didn’t analyse every Grand Final. There have been 117 of them in total, stretching back to 1898.

Instead, we checked out the stock market performance following the appearance of the teams represented in this year’s AFL Grand Final, the Western Bulldogs and the Sydney Swans.

That made it easier. To date, the Western Bulldogs (previously, Footscray), have only ever won one AFL/VFL Grand Final, in 1954.

The Sydney Swans (previously, South Melbourne), have a marginally better record, with five AFL/VFL Grand Final wins, in 1909, 1918, 1933, 2005, and 2012.

So, how do the numbers stack up? And what will our stock market forecast for the year be, depending on the victor? More below…

Bulldogs versus Swans

First, let’s take the Western Bulldogs. Its first, last, and only Premiership was in 1954. If it wins the Grand Final tomorrow, that will have been a long time ‘between drinks’.

But, looking at the performance of the All Ordinaries index after the Footscray win, we’d wager that investors should cheer on the doggies with a hearty roar.

Check out the chart below:

Source: Bloomberg
[Click to enlarge]

From 1954 to 1964, the All Ordinaries gained 120%, or 8.3% annualised. That’s a handsome return. For investors starved of big gains in recent years, most would likely take that.

So, we’ll cheer on the Bulldogs tomorrow, right? Not so fast. Let’s check out the market record following a Swans win in the past.

Unfortunately, our data for the All Ordinaries only goes back to 1935, which makes it impossible for us to track the Aussie market’s performance after most Swans wins.

In which case, for those early-century victories, we’ll check out the performance of the Dow Jones Industrial Average instead. Here’s the chart with the respective 10-year returns for each win:

Source: Bloomberg
[Click to enlarge]

In short, it’s a mixed bag. The results were as follows:

  • 1909–1919: 11.9% gain (1.1% annualised)
  • 1918–1928: 180.3% gain (10.9% annualised)
  • 1933–1943: 48.7% gain (4% annualised)

The overall average is an 80.3% gain. Not bad. But not quite as good as the Doggies. But we haven’t finished. Let’s look at the two most recent Swans’ wins. And for this, we can use the Aussie market for our ‘in-depth’ analysis [reader’s voice: surely you mean superficial and pointless analysis].

Check out this chart:

Source: Bloomberg
[Click to enlarge]

The results are:

  • 2005–2015: 10.2% (0.97% annualised)
  • 2012–Today: 24.1% (5.5% annualised)

Add these numbers to the previous Swans numbers, and the overall average is…55%.

That falls well short of the market’s performance following a Bulldogs win.

So, we only have one thing to say. And even for fear of alienating our loyal fan base of Sydney Swans supporters, we can only do one thing in the interests of investors everywhere…

We’re cheering on the Western Bulldogs to victory in tomorrow’s AFL Grand Final.


Kris Sayce,
For The Daily Reckoning

Kris Sayce
Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Daily Reckoning e-newsletter in 2005. He is currently the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service — Money Morning.

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