A strange connection – Mexican stocks and European banks

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Workers work on the construction of a new international airport at the Santa Lucia Air Base in Zumpango, near Mexico City, December 19, 2019.

Agence France Presse / Getty Images

Mexican stocks in general and European banks in particular may not seem necessarily related, but the two assets are highly correlated.

BCA Research analysts find many similarities. Mexican companies have a large stock of US dollar funded liabilities, as do European banks dependent on dollar funding.

Both are also heavily dependent on global growth, and industrial production in particular, analysts note, and both are sensitive to emerging market strains.

“Mexico, being a large borrower from emerging markets, feels the pain of the rising cost of credit strongly among borrowers in emerging markets. European banks are heavily exposed to emerging markets and therefore also feel the losses associated with widening emerging market spreads, ”analysts say.

This, according to analysts, allows the creation of a trade in pairs, in which one asset is bought and another sold short. “Because the cost of dollar funding in Europe is falling faster than in Mexico, this suggests that investors should tactically buy European banks while selling Mexican stocks,” they advise.