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“Anyone who isn’t confused really doesn’t understand the situation.” – Edward R Murrow

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50 years ago today, the United States officially withdrew from Vietnam ending what was at the time the longest war in US history and easily the least popular.  Five decades is a long time, but it’s also hard to imagine how quickly things can change in that time or even shorter.

You don’t need to look at the back of an electronic device or a tag of clothing to realize that China has long been considered the factory to the world.  However, beginning under the Trump Administration, China has, for numerous reasons, been losing its allure as a place for companies to source production and manufacturing. That trend was only exacerbated by COVID as shattered supply chains, strict COVID-zero policies, and the desire of companies not to have all their production eggs in one basket all resulted in what has become a wave of diversification.  China still remains the dominant global manufacturing source for cheap production, but other countries in the region have picked up share.

Enter Vietnam.  The chart below shows the relative strength of the MSCI China ETF (MCHI) versus the VanEck Vietnam ETF (VNM).  From 2013 right up through the end of Q1 2020, Chinese stocks handily outperformed China, but right when COVID hit, that outperformance came to a screeching halt.  Within a year after the onset of COVID, it became clear that China would maintain its strict COVID policies, investors and manufacturers looked elsewhere.  For the next year, Vietnamese stocks crushed Chinese stocks on a relative basis.  Over the last several months as China has reopened, some of the outperformance by Vietnam has reversed, but the momentum of Chinese stocks in the years from 2013 through 2020 is a broken trend.

Closer to home, Mexico has also been a winner in the wave of global manufacturing diversification. While it doesn’t have the manufacturing infrastructure of China, for certain applications or sectors, Mexico has been able to pick up share as companies save on the costs and time of shipping and can more easily oversee operations.  Given that Mexico’s economy is also one-fifth the size of China, a ‘little’ loss of share in China goes a much longer way in Mexico.

The shift in Mexico’s fortunes has clearly been reflected in the performance of Mexican stocks, especially relative to China.  Like the chart above, the one below compares the relative strength of the MSCI China ETF (MCHI) to the MSCI Mexico (EWW) over the last ten years.  Again, right up to and in the very early days of COVID, China handily outperformed Mexico, but early in the pandemic, the attractiveness of Mexico started to improve, and in the span of just over two years, Mexico has erased pretty much all of China’s outperformance from the prior eight years. Looking at charts like these is it any wonder that China was quick to pretty much drop all of its COVID restrictions in the last few months?

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