In a raging bull market there is always the temptation to buy the laggards in the hope of juicy returns from a 'catch-up' trade. Unfortunately, all too often you end up in a value trap instead: there’s a reason the stock has lagged and that reason often turns out to be annoyingly persistent. There’s no doubt that Mexico meets the laggard definition. But I would argue that there’s a strong case it could actually be a catch-up story.
On the face of it, things don’t look good for Mexico; and that’s reflected in asset prices. Its largest trading partner has threatened to scrap a free trade agreement that's been in place for almost a quarter century. In addition, a populist is leading in the polls to replace President Peña in the July elections. But look again and you might see a country potentially on the cusp of a spectacular comeback.
On some indicators equities look expensive – the CAPE ratio is the highest since the dot.com boom. But with interest rates at multi-decade lows, shouldn't equity earnings yields be low too? Rising interest rates pose a threat to valuations, but models suggest this could be offset as long as recession fears remain low.
How could investors not like technology stocks? They’re cool companies, led by charismatic CEOs making irresistible products. And what's more, they're posting amazing growth rates with stocks that just keep going up. I’m sure the bottom-up investment case is much more sophisticated than that, but today I want to lay out the strong macro case for tech stocks.