Mexican stocks are outperforming, while Peruvian stocks slump (NIHD, XRA, EWW)

Author: Andy Djordjalian

Covestor model: South America

Disclosures: Long SSRI, NIHD, EWW, XRA

June was a rough month for the global markets due mainly to concerns about European sovereign debt. Emerging markets were sharply down by the middle of the month but recovered most of that by the end of June as the Greek-debt situation eased.

My South America model underperformed its benchmark in June. There were several reasons. On the one hand, Mexican stocks did better than South American. There are a few companies in my South America model that have some of their operations in Mexico, like Silver Standard Resources (NASDAQ: SSRI), who are developing a silver mine in the country and have other reserves there, and NII Holding (NASDAQ: NIHD), provider of mobile communication services for businesses in much of Latin America. Nevertheless, the model is focused in South America, which does not include Mexico. While the A3DOW reflects a small June negative performance for Latin America overall, the ETF iShares MSCI Mexico Investable Market Index (NYSE: EWW), for example, gained 2.88% according to Morningstar. This difference explains some of the underperformance.

On the other hand, some biases in this model had a lackluster performance even when compared to the whole of South America. To begin with, Peru did not do well because the elections ended with the victory of the candidate who was considered the least market friendly by many, including me. Another bias that worked negatively in June was precious-metal miners, in particular Exeter Resource (AMEX: XRA), which was my second-largest holding in this portfolio some months ago but then entered a downwards movement that became pronounced during June. These losses were presumably caused by diminishing prices for copper (Exeter’s main project, Caspiche, is a huge reserve of copper and gold), anxiety about their future procurement of funds that was worsen by European debt problems, and the exit of investors who were expecting a takeover that did not materialize. A further reason for Exeter’s weakness may be in the recently-published economics of developing an upper layer of Caspiche, a project that would require far less capital than building a mine for the full reserve. The report was not bad if one considers that the real value of Caspiche lies in the massive resource beneath this layer, but it may have disappointed some investors who were expecting the upper layer to become a source of significant cash soon.

I believe gold and copper will continue to have strong value in the long term, regardless of the sort of corrections copper has experienced recently and gold may in the near future. I also believe that Exeter’s project is destined to be funded by one of the big mining companies holding large amounts of cash while generating more and diminishing their reserves. In the meantime, I see the company following a sound strategy by de-risking the project until a convenient offer appears. Therefore, even though I wish I had expanded my position in XRA now and not several months ago, I have confidence in the value of this stock and I will keep on being patient.

Just like with Peru and Exeter, there were several other things that “went wrong” with the holdings in this portfolio during the last seven months or so. Still, the value of the model was more or less maintained while it exhibited reasonable volatility and beta, besides tracking its benchmark fairly well. I feel satisfied that it was okay despite those things going wrong. I see it as a sign of robustness. I hope the future brings benefits from an improvement in the regional markets and by things going better with the particularities of this portfolio, to continue the positive performance since inception that was obtained before this unimpressive period and maintained throughout it.

My positive outlook for emerging markets still holds. More generally, I think the events in June were compatible with my perspectives for the global economy.

In my last report I questioned the monetary policy in the Eurozone as being too stringent for the needs of its periphery, a point that was illustrated very well in a paper released some days later by the Federal Reserve Bank of San Francisco. In that paper, most noticeably in its Figure 3, we can see the monetary policy of the European Central Bank being aligned with the needs of the European core (i.e., France, Germany, etc.) but misaligned with the requirements of the PIIGS in trouble, as these countries would need monetary expansion, at least according to the simple Taylor rule utilized in the paper.

For this and other reasons I feel that the European-debt woes are going to return, hitting stocks deemed as higher risk such as emerging markets. Nevertheless, I think there are good opportunities in these sectors and I will not wait for future waves of negative investor sentiment to pass. I believe the wise choice is to be ready to stand by the volatility while being invested selectively, combining some lower risk assets such as low-beta dividend-paying stocks and bonds from fiscally-strong countries with higher-beta stocks that have solid stories behind them and are priced attractively due to these concerns about the global economy.

As part of that strategy, I have recently started another account on Interactive Brokers covering some of that latter, more aggressive portion. I am pretty excited about that portfolio too and hope to turn it into another Covestor model.


“iShares MSCI Mexico Investable Mkt Idx chart”, Morningstar, Selected dates: 6/1/2011–6/30/2011, Retrieved: July 5, 2011

“Monetary Policy When One Size Does Not Fit All”, F. Nechio, June 13,  2011, Retrieved: July 5, 2011