Canadian Pacific Railway trains sit at the main CP Rail trainyard in Toronto on March 21, 2022.Nathan Denette/The Canadian Press
Canadian Pacific Kansas City Ltd. expects that its newly expanded North American rail network will position it well in the years ahead as U.S. companies, once enamoured with Asia, move production closer to their home bases and tap into Mexico’s low-cost labour force.
It’s a trend known as near-shoring, which certainly bolsters the case for investing in the railway. But if the trend lives up to expectations, investors might want to consider skipping the middleman and investing in Mexico instead.
Calgary-based Canadian Pacific CP-T gained its new reach after closing a deal to acquire Kansas City Southern Railway Co. in April. The merger combined North America’s smallest of the big freight haulers and links CP’s existing domestic network to additional lines that extend through Kansas City, Houston and deep into Mexico.
The added heft means that CPKC can serve customers that are moving production facilities back to North America to improve their supply chains and get closer to markets in the United States and Canada. The railway touted these benefits during its investor-day presentations this week, pointing specifically to Mattel Inc., which expanded its toy factory in Monterrey, Mexico, in 2022.
While near-shoring isn’t new, it gained urgency after international shipments were disrupted during the COVID-19 pandemic, adding significantly to shipping costs and waiting times. As well, it is a reaction to rising trade tensions between the United States and China, and a general retreat from globalization.
“We believe CP’s timing of KCS acquisition couldn’t have been better,” Konark Gupta, an analyst at Bank of Nova Scotia, said in a note.
“Even Chinese manufacturers are pivoting to Mexico, given the quick access to North American consumers,” Mr. Gupta said.
Morgan Stanley agrees. The financial giant earlier this month noted that 40 per cent of Mexico’s gross domestic product is tied to export manufacturing.
It expects that near-shoring will boost the country’s manufacturing exports to the United States to US$609-billion over the next five years, up from US$455-billion today – a 34-per-cent increase – which will provide a boost to GDP over the coming years.
“A boost in GDP growth would be transformative for domestic stocks,” Fernando Sedano, Morgan Stanley’s Latin America Economist, said in a note.
In other words, if near-shoring is good news for CPKC, it’s great news for Mexico – a market that is accessible to Canadian investors through exchange-traded funds and American Depositary Receipts (ADRs), and where stocks trade at valuations that are a fraction of, well, CPKC.
The railway stock has more than doubled over the past five years, rewarding investors who followed Warren Buffett’s approach to rails when his company, Berkshire Hathaway Inc. BRK-A-N, bought Burlington Northern Santa Fe in 2009. That was seen then as a long-term bet on the U.S. economy, and one that is generally immune to global competitive pressures.
But the rails aren’t cheap. CPKC’s shares now trade at 26 times trailing earnings, a valuation that puts the stock well above the price-to-earnings ratio of 12.9 for the blue-chip S&P/TSX 60 Index.
However, the railway delivered a sobering near-term financial outlook this week, reflecting the downturn in shipping volumes. It expects profit growth, excluding unusual gains and losses, in the mid-single digits this year. That’s lower than the 11-per-cent growth that analysts, on average, had been expecting.
Based on recent performance, Mexican stocks aren’t bargains either: The iShares MSCI Mexico ETF EWW-A, which gives investors exposure to 44 stocks, has already rallied 28 per cent so far this year.
But the gains suggest that Mexican stocks may be catching on as a direct bet on near-shoring. They can outperform indirect plays based in Canada or the United States. CPKC’s share price, for example, has risen just 4-per-cent year-to-date.
Even better, Mexican stocks trade at attractive valuations. The average P/E ratio for holdings in the iShares fund is just 10.8 – and investors get a dividend yield of 3 per cent. For access to individual companies, stocks like América Móvil, Fomento Económico Mexicano and Cemex trade in New York as ADRs, which are equity securities that allow investors to bypass foreign exchanges.
For sure, Mexico is an emerging market whose economy can deliver far more thrills and chills than a highly regulated North American railway. But if near-shoring gains momentum and Mexico becomes a clear winner from the trend, it looks like a strong bet.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
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