Merrill Lynch is suggesting that investors buy credit default swaps on Mexico as a way of protecting against emerging market risk. We are seeing a combination of the fighting the last emerging market war and missing the last battle with this recommendation. Yet, there is a place of buying protection when the market gets ahead of itself.
A look at credit default spreads show a market in a tremendous rally. At spreads below 170 bps we are at levels pre-Lehman; however, we are still way above the price paid earlier in the credit crisis. If we are not coming out of the global recession, then buying emerging market protection makes sense, but that misses the story of emerging markets which may be the leaders in recovery not the followers. History this time is different, but there is still a case for looking at specific country risk and in this case Mexico is a perfect candidate. If the global economy double dips, Mexico is in for a fall. If we do have a continued recovery Mexico may be a laggard given its weak economy. As the globe start to further grow, we may see a shifting of flow effects to stock or balance sheet effects and the numbers do not look as compelling for Mex.
Bloomberg Mexico forecast shows deep cuts in GDP though some recovery in 2010. 2009:4 down 3.1 from don 1.1 for August survey period. The government is also starting to think about raising taxes which is never good in a recession. The market is starting to punish the peso for these policy ides.
A look at credit default spreads show a market in a tremendous rally. At spreads below 170 bps we are at levels pre-Lehman; however, we are still way above the price paid earlier in the credit crisis. If we are not coming out of the global recession, then buying emerging market protection makes sense, but that misses the story of emerging markets which may be the leaders in recovery not the followers. History this time is different, but there is still a case for looking at specific country risk and in this case Mexico is a perfect candidate. If the global economy double dips, Mexico is in for a fall. If we do have a continued recovery Mexico may be a laggard given its weak economy. As the globe start to further grow, we may see a shifting of flow effects to stock or balance sheet effects and the numbers do not look as compelling for Mex.
Bloomberg Mexico forecast shows deep cuts in GDP though some recovery in 2010. 2009:4 down 3.1 from don 1.1 for August survey period. The government is also starting to think about raising taxes which is never good in a recession. The market is starting to punish the peso for these policy ides.
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