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.
On Friday, we are likely to receive confirmation that Chinese inflation jumped to almost 3% in February, up from 1.5% previously. Higher Chinese inflation conjures up scary scenarios. It could force the People's Bank of China into hiking interest rates when the economy is slowing and saddled with massive debt. It could also add to building inflationary pressures in the US and UK, hastening interest hikes and weighing on equity and bond prices. But relax! The jump in Chinese inflation shouldn’t trigger any of this.