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“Things always seem to end before they start.” – Lou Reed

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A few hours ago, it appeared as though we’d be seeing a respectable rally to start the trading day, but much of the gains have faded and there’s still nearly an hour left before the opening bell.  The pullback this morning has come in tandem with a sell-off in European stocks which are well of their highs of the day, and one catalyst has been a batch of mixed PMI readings for August.  While activity in the manufacturing sector did not shrink by as much as expected, Eurozone services sector activity unexpectedly contracted.  In Asia, most major indices were positive during the session, but China was a notable laggard as the CSI 300 fell 1.64% taking its MTD decline to just under 8%.

Weakness in China has really acted as a drag on the performance of Emerging Markets as an asset class as the country accounts for 30% of the entire index, but closer to home, Mexico, which has a much smaller representation in the index, has been moving in the exact opposite direction. The chart below shows the performance of the iShares China (MCHI) and Mexico (EWW) ETFs over the last ten years. While the two ETFs performed similarly with each other from August 2013 through August 2015, they really started to diverge from late 2015 through the onset of COVID, and as concerns over supply chains intensified during the pandemic, Mexico’s renaissance began.  Despite periods in the last ten years where the performance of the two ETFs couldn’t have been more divergent, through yesterday’s close their performances was very similar; the MSCI China ETF (MCHI) was down 2.49% over the last ten years, while Mexico (EWW) was down 4.33%. On the chart, Mexico looks like the reflection of China much as the way a mountain range reflects on a lake.

The chart below shows the relative strength of EWW relative to MCHI over the last decade, and this chart further illustrates the roller coaster of Mexico relative to China. From late 2013 right through the onset of COVID, China steadily outperformed Mexico, but with the onset of COVID, the trend reversed abruptly, and in the span of three years has erased seven years of underperformance.

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