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 | | | | International Comeback? Takeaways from Mexico City |
| | What’s On Our Mind
Rob Hordon, Co-Founder
76research |
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| | Being an international stock picker at this point is a lot like being a New York Giants fan. Ten to fifteen years ago, things weren’t bad at all. Now merely getting back to mediocrity feels like a dream too big.
I primarily focus on American companies now but have always been a global investor. So I definitely have empathy for fund managers who specialize in international (i.e., non-U.S.) stocks.
International stocks have finally been having a few days in the sun after many years of rather drastic underperformance.
As of the end of trading yesterday, non-U.S. developed market (EAFE) stocks are up about 11% year to date. Emerging market stocks are up about 6%.
This is notably better than U.S. stocks, with the S&P 500 down about 1.5% so far this year, although doing better in recent days. At its lowest point in mid-March, the S&P 500 was down about 6%.
A large reversal over the past four weeks in tech stocks, especially the Magnificent Seven that dominate the top of the holdings list, has been the main drag on U.S. performance. |
|  | | We are always thinking about ways to enhance our content. In that sprit, we are introducing What’s On Our Mind as a new format for the 76report. The idea is to communicate with readers in a more direct, first person way from time to time—especially when there are particular topics, opinions, or recent experiences that we are keen to discuss! |
| | Financial theory suggests one geography should not totally outperform another over a long period of time. Stock markets, while perhaps not perfect, are supposed to be generally efficient.
Sure, stocks in one country or region can do better than those in another in any given year or for a few years. But over time, it’s supposed to even out.
After all, investors are more or less taking on the same degree of risk and therefore should be rewarded similarly. “Reversion to the mean” is the statistical way of saying this.
That’s all just theory, though.
While we have seen a nice little bump in international stocks so far this year, if we are truly going to revert to the mean, we have a very long way to go.
And as any Giants fan can attest, a few strong possessions do not mean you are going to win the game. |
|  | Over the past 10 years, U.S. stocks have compounded at annual rate of return of 12.6% versus 5.6% for non-U.S. developed market stocks and 3.5% for emerging market stocks.
Put differently, investors who put money in international stocks 10 years ago are looking at total gains of 40% to 70%. Investors who put money in the S&P 500 have more than tripled their investment.
If international stocks are going to catch up with the U.S., we basically need to see a total collapse in earnings and multiples in the U.S. and/or the exact opposite happen outside the U.S.
This is hard to imagine, especially given the negative impact that a collapse in corporate earnings in the U.S. would have on foreign countries and companies.
International stocks could possibly do better than U.S. stocks in the years ahead—but catching up is nearly impossible at this point.
Checking in on Mexico
For better or worse, I find it difficult it to go to another country (or frankly leave my house) without wearing my investor hat.
So when I accompanied my wife on a business trip to Mexico City last weekend, I as usual approached it, at least partly, as a fact-finding trip. To be clear, a long weekend away with your spouse is no substitute for investment research… but it can be eye-opening.
Mexico is of course in the news on a daily basis these days as Trump implements his tariff policies. In 2024, Mexico was the largest trading partner of the United States for the second consecutive year and broke a record for total trade volume in excess of $800 billion.
Mexico is also the main source of America’s illegal immigration and fentanyl challenges. The vast majority of this activity takes place on the Mexican border, with drug cartels leading coordination efforts.
International stocks, including emerging markets, have done relatively well recently, but Mexico has actually lagged.
To be fair, the iShares Mexico ETF (EWW) is up 12% year to date, but this is only after Mexican stocks had severely underperformed the emerging market index in the second half of 2024. |
|  | Global stocks since Sheinbaum was elected |
| Recent strength in developed market international stocks has been driven mainly by European shares, following stimulus announcements in Germany. The iShares Germany ETF (EWG) has gained more than 20% this year.
Tariff concerns have sparked a rotation away from U.S. tech towards previously poorly performing European stocks, which may now benefit from domestic policy shifts.
But as the chart above demonstrates, U.S. stocks really started to outperform both developed and emerging market international stocks starting around early October last year. This is when the stock market began to price in a Trump victory.
U.S. outperformance continued into the new year. It has really only been in recent weeks that we have seen the market move away from the U.S. towards international.
Perhaps the best way to interpret what we have witnessed in recent weeks is as a reversal of very strong (maybe excessive) U.S. outperformance in the months that preceded it.
This outperformance was mostly related to the tech sector, which particularly benefited from enthusiasm around Trump’s election.
China recovery
If Europe is driving the bounce in developed market stocks outside the U.S., when it comes to emerging market stocks, China is leading the way.
Chinese equities are the largest component of emerging market indices. Mainland China represents nearly 30% of EM indices, followed by Taiwan at around 20%.
Chinese stocks have been performing quite well this year, after starting to stumble relative to U.S. stocks around April 2023. The MSCI China Index is up around 17% year to date, while the S&P 500 is slightly down. |
|  | S&P 500 vs. China ETF - Total Return (Past 3 Years) |
| Unlike Europe and most emerging market economies—but similar to the U.S.—the technology sector is extremely important to the Chinese stock market. And Chinese tech is now making a big comeback.
We have written a lot about DeepSeek, the Chinese AI start-up. But China has also been grabbing attention for rapid advances in robotics and automobiles.
Most recently, battery and electric vehicle manufacturer BYD has stolen the spotlight.
Shares of BYD (which can be purchased in the U.S. through an ADR that trades under the ticker BYDDF) started to take off in early February. They are up nearly 50% this year.
BYD recently impressed the market with strong financial results. Revenue in 2024 even surpassed that of Tesla (TSLA).
As Tesla dealers and owners contend with politically motivated violence, which has fueled recent negative sentiment toward TSLA shares, BYD has become a legitimate global competitor.
BYD also announced a major breakthrough in EV battery recharging time. It now only takes five minutes for BYD batteries to take on a charge that can provide 250 miles of driving range.
Chinese EVs everywhere
As soon as we landed in Mexico City and got off the plane, we saw a billboard for a BYD vehicle. We then got into our Uber that would take us to the hotel, which was of course a compact BYD electric car. |
|  | Build Your Dreams: A compact EV in Mexico City |
| China is not only selling a lot of (low-priced) electric cars in Mexico but has been using Mexico as a backdoor to access the American market, especially after Trump imposed tariffs on China in his first term.
Just as Chinese crime gangs send precursor chemicals to Mexico which are then reformulated into fentanyl and distributed throughout the United States, Mexican exports to the U.S. now tend to have a lot of Chinese content.
According to Moody’s Analytics, the share of “foreign added value” incorporated into Mexican exports by China rose from less than 5% in 2000 to almost 40% in 2020.
To evade tariffs, China has redesigned its supply chains. Much of the final assembly of manufactured goods that originate in China now takes place in Mexico.
Container shipments between China and Mexico have also been surging as the two economies have become increasingly intertwined. In 2024, container shipment growth was reported at 60%.
Prosperity and sophistication
To be honest, I did not quite know what to expect in Mexico City, having never been. My presumption was that safety would be a major variable—like in Sao Paulo, Brazil, which I have visited a couple of times for work.
I also expected to find many visible signs of poverty and challenged living conditions.
What I found instead was a large, vibrant metropolis that in many ways reminded me of a European city. The people were extremely friendly. We naturally restricted ourselves to nicer areas, of which there are many, but at no point did we feel unsafe.
The Mexican stock market has stalled a bit in the aftermath of Sheinbaum’s election and Trump’s tariff moves. The Mexican economy may be slowing down but does not appear to be collapsing.
GDP growth in 2024 was 1.5%, which is a decline from prior years above 3%. Forecasts over the next three years are in the 1% to 2% range.
For tourists, a tremendous value
The Mexican peso (now around 20 per dollar) fell considerably last year, especially after the election of Sheinbaum. Investors are worried about a drift towards socialist policies.
The peso is now close to its weakest levels in recent years, if one excludes the worst of the Covid crisis (when investors throughout the world flocked to the dollar as a safe haven). The peso has also depreciated considerably over a longer time frame. |
|  | The weak peso may not be great for the American manufacturing sector as it competes with the China/Mexico manufacturing nexus… but it was good from the standpoint of a visitor.
A visit to Mexico City is arguably justified by the food alone, from street food to fine dining, which was available at a fraction of what similar meals would cost in the U.S.
Not that you could get similar meals. For the first time in my life, I ate grasshopper. I have the photos to prove it but will play it safe and leave it to the reader’s imagination.
(To be honest, it wasn’t bad at all. It was prepared as a delicacy at a very upscale restaurant that specializes in contemporary Mexican cuisine. Roasted, with light spice and onion, it was crunchy and delicious.)
America’s ancient past
As a history buff, I found it quite interesting to get a fresh and different perspective on the North American continent.
U.S. history tends to begin with the pilgrims and the native peoples they encountered, but there is of course a longer backstory. A trip to Mexico City brings that story to life.
The National Museum of Anthropology was a true highlight—providing an archeological journey that traces mankind’s presence in the Americas, beginning with the first settlers from Asia who traversed the Bering Strait some 15,000 years ago.
These nomads followed woolly mammoths and other animals down the west coast of what is now the United States. They traveled all the way to what is now central Mexico, which at the time was much less arid. |
| Many cultures rose and fell over the millennia. These include the ones that built impressive pyramids which anchored the continent’s largest city at the time, Teotihuacan, which we had a chance to visit.
The pyramids were built and rebuilt as religious structures about 1,500 to 2,000 years ago. |
|  | | When the Spanish finally arrived in 1519, they encountered the Aztecs, which was at that point the dominant culture (and had been for a few hundred years).
While the United States was certainly influenced by the settlers’ interactions with Native Americans, the Mexican culture we know today is very much a fusion of European Spanish culture and indigenous groups like the Aztecs.
A complicated relationship with the U.S.
Just in case any Americans get homesick, the United States makes a few cameo appearances in the Mexican story.
Below, we see ambassador Henry Lane Wilson (the gentleman on the left) depicted in a mural that hangs in the National History Museum. He is plotting a coup that took place in 1913.
One cannot help but wonder if former National Security Advisor John Bolton modeled his own moustache on Wilson’s, given his shared penchant for regime change operations. |
|  | The U.S. ambassador plots a coup |
| Most Americans who have been to Mexico have probably been to one of the many resort cities or cruise destinations.
While these locations have much to offer tourists, a visit to Mexico City, the country’s commercial and cultural capital with a population greater than 20 million people, is an entirely different experience.
Mexico City is fun, impressive and affordable. And I can’t emphasize this enough… while you don't have to order everything I ordered, the food is exceptional! |
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