The United States’ relationship with China continues to worsen.
It hasn’t been this bad in decades – likely since 1972 when President Nixon finally moved to improve America’s dealings with communist China.
Of course, the China of 2021 is very different from the China of 1972.
The current version of China has a powerful economy and military.
Stress between the two countries has been building since 2013, when Chinese President Xi Jinping came to power and instituted a more aggressive playbook than his predecessors.
The Trump administration escalated things further…
First by putting higher tariffs on goods imported from China and then by placing certain Chinese companies on a blacklist that limits their business dealings.
Further tension arrived in 2020 when the Chinese Consulate in Houston was closed by the U.S. on the grounds of it stealing U.S. and European intellectual property.
COVID-19’s Chinese origin hasn’t helped relations either.
Then there’s the ticking time bomb that is Taiwan.
China views the independently governed Taiwan as a renegade province that must eventually unify. And unification would require a Chinese invasion.
That puts the U.S. – which has sold billions of dollars’ worth of arms to Taiwan to help the country defend itself – squarely on the other side.
How the U.S. would respond to a Chinese invasion of Taiwan isn’t clear, but a military response isn’t out of the question.
President Biden just had the U.S. Navy conduct a major training exercise in the South China Sea.
Last summer, FBI Director Christopher Wray painted a stark picture of just how bad relations between the U.S. and China have become.
Wray said that “the stakes couldn’t be higher” and that acts of espionage and theft by the Chinese government are the “greatest long-term threat” to the United States.
That implies China is now public enemy No. 1 for the U.S.
Wray noted that the FBI is opening a new counterintelligence case related to China every 10 hours and that of the 5,000 open counterintelligence cases in the U.S., half are tied to China.
Public perception has picked up on this, as currently 45% of Americans view China as the United States’ greatest enemy.
Good News for Mexico
COVID-19 has exposed how dangerously reliant our supply chain is on China.
The United States is dependent on China for medical equipment and pharmaceutical, auto and tech products.
The U.S. Department of Defense even released an urgent report detailing how the U.S. military is alarmingly reliant on China.
This is a situation that simply has to change.
Our critical supply chains can’t be dependent on the nation that is now considered to be the greatest threat to our future.
Where, then, can American companies look to for an alternative cheap, less risky and more friendly place to move supply sourcing and manufacturing?
The obvious answer is our neighbor to the south: Mexico.
As we emerge from COVID-19, I believe we are going to see massive amounts of capital flowing into Mexican manufacturing businesses.
That sets Mexico’s economy up for a high rate of growth over the next decade, which is bullish for Mexican stocks.
Also, the Mexican government didn’t crank up the money printing presses as a response to the pandemic, which is bullish for American investors interested in Mexican stocks.
Over the past 15 months, Mexico’s fiscal policy has remained largely unchanged.
That restrained central bank monetary policy is bullish for the Mexican peso relative to the U.S. dollar.
Here in America, the money printing presses have been almost worn out. That is bearish for the strength of our dollar.
In his 2021 Global Outlook, Ray Dalio, the head of Bridgewater Associates – the most powerful hedge fund in the world – called Mexican assets (along with Japanese and Brazilian assets) “one of the largest opportunities” that he has seen in his decades of managing money.
Dalio thinks that both the assets in these countries and the currencies that underpin them are very cheap.
He said getting exposure to currencies of countries that haven’t been printing money like mad is going to be a “big deal” in the years ahead.
The most diversified way to get exposure to both Mexican stocks and Mexico’s currency is the iShares MSCI Mexico ETF (NYSE: EWW).
As American businesses exit China and head to Mexico, this exchange-traded fund should perform very well.