Why Goldman Sachs Is Interested in a Small Bike Shop in Mexico – WSJ

Why Goldman Sachs Is Interested in a Small Bike Shop in Mexico – WSJ

 

Goldman Sach’s (GS) recent move into the more entrepreneurial side of Mexico via a credit line of up to $100 million to a four-year old fintech firm (Creditjusto) that specializes in making 3-year loans to small businesses is yet another aspect of our Rise of the New Middle Class. Advances in both technology and in finance are enabling individuals and small companies in emerging markets to access resources that had been previously completely unobtainable. This is allowing for access to the tools of wealth creation across a wider range of society, providing a tailwind for our Rise of the New Middle-Class Investing theme.

According to a recent WSJ article,

The bulk of lending by Mexican banks targets large corporations, home mortgages and consumers, according to the Bank of Mexico. More than 80% of Mexican small businesses rely primarily on supplier financing, not bank credit, Banxico said.

This is changing however, fueling the fires of innovation and entrepreneurship in countries in which such growth was limited.

A host of new online lending platforms and supply-chain financing services have popped up in recent years in Mexico to help fill the void, said Andres Fontao, a co-founder and managing partner of Finnovista, a firm that advises fintech startups.

As companies like Creditjusto expand, offering needed capital to fund growth, so will Mexico’s Middle Class. As the Wall Street Journal points out,

Goldman’s involvement is a reminder of how small fintech companies are challenging and reshaping the banking industry, especially in developing markets like Latin America.

Source: Why Goldman Sachs Is Interested in a Small Bike Shop in Mexico – WSJ

Mexico pushes mobile payments to help unbanked consumers ditch cash | Reuters

Mexico pushes mobile payments to help unbanked consumers ditch cash | Reuters

 

The evolution of mobile payments in emerging economies sits right at the intersection of our Digital Lifestyle and New Global Middle Class investing themes. Just as we saw emerging economies able to leapfrog with communication infrastructure thanks to the advent of the mobile phone, so are we now seeing them leapfrog with retail banking options. A recent article on Reuters describes what is happening just south of the border where “Mexico’s new leftist government is betting on financial technology to help lift people out of poverty.”

“In the future, it will no longer be necessary to have a bank in the sense of a traditional, established bank,” said Arturo Herrera, Mexico’s deputy finance minister. “Mobile phones will become banks.”Phone-based banking has proven a hit among the poor in other emerging markets such as China, India and Kenya. Those efforts have been driven by private sector companies that offer user-friendly, affordable apps.

This is similar to what we are seeing in India as that nation also looks to take advantage of mobile technology to provide banking services to the hundreds of millions of its citizens that are currently unbanked, giving them an ability to work their way out of poverty that would have otherwise been impossible.

Our investing themes look towards those companies providing the technology that allows for such implementations and those companies that will benefit as these implementations are rolled out.

Source: Mexico pushes mobile payments to help unbanked consumers ditch cash | Reuters

‘Trump Bump’ for Dow Industrials Is Biggest Post-Inaugural Move Since FDR – 

‘Trump Bump’ for Dow Industrials Is Biggest Post-Inaugural Move Since FDR – 

This morning I was on Varney and Company on Fox Business talking about the impressive run-up in U.S. stock indices. While we were on air, the U.S. markets opened and shortly thereafter the Dow broke to new highs at 20,700.

Only one other president in history has seen such remarkable gains since their election. After John F. Kennedy’s election, the S&P 500 gained 13.05 percent while post-Trump’s election we’ve seen a 9.7 percent gain. The post-election moves this time have been remarkably steady, as we’ve experienced 89 days without a 1 percent decline and the VIX has remained at multi-decade lows. Last Wednesday 8 percent of the S&P 500 saw new all-time highs.

An article in today’s Wall Street Journal declared,

“President Donald Trump has been doing a lot of bragging about the stock market rally lately. How does it measure up? By some measures, the rally that took place during Mr. Trump’s first 30 calendar days in office has been the largest since 1945. Since inauguration day on Jan. 20 through Friday, the Dow industrials climbed more than 4%.”

The strength in stocks hasn’t been just domestic, as the majority of the largest stock markets around the world are in overbought territory and not one of the thirty largest country-based ETFs is in oversold territory.

To put the U.S. gains in perspective, the Market Vector Russia ETF (RSX) has gained even more than the S&P 500, up 15.3 percent since the election versus 9.4 percent for the S&P 500 ETF (SPY).

Since President Trump’s inauguration, the iShares MSCI Mexico Capped ETF (EWW) has gained the most of any asset class, up 7.2 percent versus the S&P 500 (SPY) up 3.7 percent.

Pricing in the U.S., as we keep mentioning here, is at elevated levels, with the S&P 500 at the highest forward 12-month P/E/ ratio since 2004 at 17.6. This is well above historical norms as the 5-year average is 15.2, the 10-year is 14.4 and the 15-year is 15.2.

That forward P/E also assumes an exceedingly robust growth rate in EPS for the S&P 500 to be over 11% in the coming year, which is a profound change from what we’ve seen over the past 4 to 5 years. If we don’t get that kind of explosive growth, then today’s valuations are even more stretched.

Implicit in those assumptions is the impact of corporate tax and regulatory reforms on margins and the impact of individual tax reforms on spending. With the level of divisiveness in D.C. paired with 23 Democrats in the Senate up for reelection in 2018, Trump is facing an uphill battle to get his plans passed. Regardless of where one stands concerning the president, roughly half of the country is opposed to him, and those opposed are very vocal. House and Senate Democrats will be facing a lot of pressure from their constituents to not cross the isle and join the Republicans.

That being said, the level of momentum we see in this market is irrefutable, so shorting it is a dangerous business. Those who hop in now need to understand that they are going in for momentum, as the likelihood that all these hopes and dreams don’t come through promptly is pretty high, which means better buying opportunities are likely in store later on.

Source: ‘Trump Bump’ for Dow Industrials Is Biggest Post-Inaugural Move Since FDR – MoneyBeat – WSJ

America First? When it comes to GDP we get the bronze!

America First? When it comes to GDP we get the bronze!

Yesterday we talked about how the American economy, despite all the euphoric headlines since the election, didn’t deliver much of a performance in the fourth quarter and in fact we saw the weakest full-year GDP growth rate since 2011 which was well below the U.K.’s 2016 growth rate of 2 percent. Today we learned that the Eurozone as well kicked our economic tuckus in 2016.

GDP grows 0.6% in final quarter of 2016, beating expectations and taking annual figure to 1.8%

Yep, that hurt. So much for America being the “cleanest shirt in the economic laundry.” Despite headwinds ranging from the accelerating Greek drama to the mountain of Italian non-performing loans that led to the nationalisation of Banca Monte dei Paschi di Siena, Brexit, failed Constitutional reforms leading to the resignation of Prime Minister Renzi in Italy …. the list goes on, they beat us.

 

Last week talks between the U.S. and Mexico hit a serious bump after a President Trump Tweet led Mexico’s President Peña Nieto to cancel their upcoming meeting, while the administration has been threatening a 20 percent tax on imports from Mexico, which would put serious upward price pressure on, (among other things) fruits, vegetables and auto parts. Today Peter Navarro, Trump’s top trade advisor, accused Germany of currency exploitation. According to the FT, “In a departure from past US policy, Mr Navarro also called Germany one of the main hurdles to a US trade deal with the EU and declared talks with the bloc over a Transatlantic Trade and Investment Partnership dead.”

While last week’s meeting with the British Prime Minister Theresa May ended with some serious hand-holding, over the weekend the President’s sudden implementation of an immigration ban left, “our closest ally flailing after the UK government was openly contradicted by US diplomats over which British nationals were covered by the measure.”

After Trump’s election victory, the Bank of Japan was initially more optimistic about more favourable economic conditions amid expectations for stronger American growth. That enthusiasm has been fading as yesterday, ahead of a two-day policy meeting, officials are less optimistic about the impact on Japan’s economy. According to the Wall Street Journal, “We now realise that we know very little about him.”

Trump’s team has been poking our allies in some uncomfortable ways, making many around the globe nervous, and yet the VIX (a measure of implied volatility) is pretty much yawning.

The 90 percent of the America economy that is not represented by either inventory build or state and local government spending managed to grow at a whopping 0.6 percent annual rate in the fourth quarter.

Amidst all this, the Fed keeps talking about further rate hikes

Under Armour (UA) just released its fourth quarter and full year results and was yet one more citing currency headwinds.

Upon the announcement of Trump’s immigration ban on Friday, the markets started to fall. Monday the S&P 500 fell 60 basis points and is now down 0.76 percent from its most recent closing high last Wednesday. Bespoke compiled headlines over the past few days that reveal concerns the Trump hope trade is starting to fade.

Is this an inflection point? Too soon to tell, but we can say that having an administration with no political history who has pretty much tossed out the rule book is likely to cause heightened volatility, which is not reflected in market pricing. Erecting trade barriers and surprising the market, let alone allies, is likely to induce more caution in the C suite.

This morning we also saw that compensation costs in 2016 rose 2.2 percent, significantly faster than GDP of 1.6 percent, which makes another Fed hike more likely. We’ll be hearing from the Federal Reserve on Wednesday and will be looking to see if the tone from the FOMC meeting is more dovish than we heard in Fed Chair Janet Yellen’s testimony on January 19th. We will also hear from over 100 companies this week on their earnings, putting the relative complacency in the markets to a test.

Source: Eurozone’s economic recovery picks up speed

NAFTA is in the hot seat, but trade isn’t as simple as America wins

NAFTA is in the hot seat, but trade isn’t as simple as America wins

With around a quarter of all U.S. imports consisting of raw materials and intermediate good that are inputs into American-made products, trade barriers that make those imports more costly also make American-made products more costly and less competitive on the global market. While the rhetoric around trade has been a straightforward, America first, the reality is a bit more complex.

Mexico sends about 80 per cent of its exports north of the border but those goods contain as much as 40 per cent US content, helping support nearly 5m jobs in the US.

All that could be at risk if, as Mr Trump has warned, the US does not achieve what it considers a “fair deal” for American workers and decides to pull out — as he has already done from the 12-nation Trans-Pacific Partnership that Mexico saw as a way to equip Nafta for the 21st century.

Reducing the trade deficit would also serve to make the dollar stronger, which further makes American products more expensive – be careful what we wish for.

While America First certainly sounds appealing in many ways for a nation that has suffered the worst recovery in history, the devil, as they say, is in the details.

“With the benefit of hindsight, [Nafta negotiations] were relatively easy because the three parties shared the same end goal. The main problem today is still that we don’t know what they [the US] want,” Jaime Zabludovsky, a Mexican Nafta negotiator, told the Financial Times.

Source: Mexico braced for confrontation with Trump team