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Canada, Mexico doing OK
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Published: July 13, 2008
As stocks around the world tumble deeper into bear-market terrain, two unlikely markets have fared better than most — Canada and Mexico.
Both nations are closely linked to the U.S. economy but have managed to avoid the kind of stock-market hemorrhaging that is occurring around the world.
Canada is roughly flat for the year, the lone exception to large losses registered across developed markets. In Mexico, while stocks have fallen this year, the drop is modest compared with the double-digit declines in many other emerging markets.
Canada has taken its cue from soaring commodity prices, one reason its endurance could be fading. If commodity prices start dropping, as they have shown signs of doing in recent days, shares in Canada could get hit hard. The benchmark S&P/TSX Composite index has fallen 10 percent since hitting a record high in June. But it remains down just 1.6 percent in 2008.
Unlike other emerging markets, Mexico didn't have a dizzying rally in 2007. As fears of a U.S. slowdown grew late last year, investors began punishing Mexican stocks, particularly home builders, leaving the market ahead of the curve in the latest adjustment among global stocks. The country's benchmark index is down just under 5 percent this year, while stocks in Asia and other emerging markets like Russia have registered much bigger losses.
Canada and Mexico are both slowing in response to the economic drag from the U.S. But they are holding up better than might have been expected, given that four-fifths of their exports go to their bigger neighbor and their currencies have strengthened against the dollar over the past year, denting competitiveness.
Even as some regions of Canada suffer from the U.S. slowdown, other parts have been turbocharged by the global commodity boom. In Mexico, the country's oil exports have kept money flowing into public coffers, which the government has used to bolster the economy through spending on infrastructure.
The International Monetary Fund expects both Canada and Mexico to notch modest economic expansion this year — 1.3 percent and 1.9 percent, respectively — compared with just 0.5 percent for the U.S.
Canada's benchmark index is dominated by stocks in the energy and materials sectors, which account for about 50 percent of the index's market value, reflecting the country's wealth in oil, natural gas, minerals and fertilizers.
"As go commodities, they likely will go the Canadian market," said Garey Aitken, the chief investment officer of Bissett Investment Management in Calgary, Alberta, which manages about $17 billion and is a unit of Franklin Templeton.
Natural-gas and crude-oil futures prices have dropped sharply in the past few days. Some of Canada's big winners — such as EnCana Corp., a producer of natural gas, and fertilizer giant Potash Corp. of Saskatchewan — have also been hit. Their stocks have fallen 12 percent and 5 percent, respectively, since the start of the month, but are still sitting on large gains this year.
Research in Motion, the maker of the BlackBerry e-mail device, has gained about 4 percent in 2008. Even though it doubled profits and revenues from the year-earlier quarter, investors nevertheless punished the stock last month when the company showed rising expenses.
All three stocks trade on the Toronto Stock Exchange, but have ADRs, or American depositary receipts, that trade in the U.S.
Canada's financial sector, which accounts for about one-fourth of the Canadian benchmark, has languished, as has its U.S. counterpart, but didn't suffer from the credit meltdown to the same extent as south of the border.
The banks "have been laggards, not bleeders," said George Vasic, a strategist at UBS Securities Canada. Big consumer stocks, meanwhile, have fallen sharply, reflecting worries over a slowing economy.
Despite its relative resilience this year, Canada tends to fall through the cracks among U.S. investors, as it isn't included in a widely followed benchmark for international fund managers. It is a big lacuna: At the end of June, Canada accounted for a bigger slice of global market value outside the U.S. than Germany.
Some Mexican stocks have mounted a comeback this year. Desarrolladora Homex SAB, a home builder, has rebounded 16 percent this year after falling by the same percentage last year. Mexican stocks are currently trading at about 11 times their expected earnings for 2008, according to Citigroup, making them relatively inexpensive.
But economic worries linger.
"Clearly, if the U.S. goes into a much deeper recession, there's always a possibility of another leg down," said Geoffrey Dennis, a Latin American strategist at Citigroup.
At the same time, inflation is on the rise in Mexico, as in other emerging markets, which eats into spending.
"We do take a cautious view on the Mexican consumer," said Will Landers, who manages $8 billion in Latin American stocks at BlackRock.
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