Diversifying Investment Portfolios With CFDs in Mexico

The traditional Mexican retail investment environment has been constrained by a lack of infrastructure to diversify across a broad range of asset classes without institutional connections or large capital bases. The standard portfolio offered to a Mexican retail investor ten years ago was largely composed of domestic stock, peso-based fixed income, and whatever foreign exposure could be obtained via local mutual funds with limited instrument coverage and significant fee burdens. The increased availability of leveraged instruments through retail platforms has altered that image significantly, as Mexican investors now build portfolios with a true breadth of geography and asset categories instead of the illusion of diversification within a limited universe of instruments.

The fact that the peso is a risk-sensitive emerging market currency poses a distinct challenge in diversification to Mexican investors because all their income, savings, and local investment assets are all in the same currency. During deteriorations in global risk appetite, domestic equity valuations come under pressure, and this correlation between the two largest elements of a typical Mexican investor’s financial position increases total portfolio volatility instead of alleviating it. Such instruments — whether dollar-denominated commodity exposure, a global equity index with a different sensitivity structure, or a currency pair that strengthens when emerging market assets weaken — address a real structural weakness in peso-concentrated portfolios that conventional domestic investment products cannot resolve.

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The natural affinity of Mexican investors toward commodity exposure is due to the economic linkages that the country has with the markets of the raw materials. The relationship of oil to domestic fiscal health, the role of silver to a nation that produces it in large amounts, and the agricultural commodity markets that impact food prices and the performance of the agricultural sector are all themes that Mexican investors can look at with actual contextual comprehension as opposed to pure technical analysis. Introducing a leveraged position in these instruments exposes the portfolio to commodity cycles that a Mexican investor experiences only indirectly through their effect on the domestic economy, converting background economic exposure into a directly managed portfolio position. For those pursuing CFD trading strategies, commodity-linked instruments offer some of the most contextually grounded opportunities available to Mexican retail participants.

Trading on international equity indices offers the geographic diversification aspect which best supplements a portfolio that is otherwise concentrated on Mexican domestic assets. The Mexican and US equity markets have a real but imperfect correlation, and exposure to economic cycles driven by different factors in European, Asian, and emerging market indices is likely to provide support precisely when Mexican assets are under pressure. A Mexican investor who adds positions in indices with varying sectoral and geographic exposures is not eliminating correlation with domestic assets but is reducing the concentration that makes a purely domestic portfolio especially susceptible to the particular risk factors that directly impact Mexico.

Although fixed income instruments are not directly available in their traditional form via most retail CFD platforms, their dynamics affect the available instruments in ways that portfolio-aware Mexican traders take into consideration. The correlations between interest rate expectations and currency values, yield differentials and capital flows, and credit spreads and equity valuations offer analytical links that cross-asset-aware investors can employ to build more consistent portfolio positions than investors who look at each instrument separately. When a Mexican trader considers the impact of the easing process of the Banxico on the peso, and how that feeds into the competitiveness of Mexican exports, and how that relates to domestic corporate earnings, he thinks of his portfolio as a system, not a set of independent bets.

Rebalancing ensures that portfolios retain their desired diversification properties over time, as opposed to those that drift to unwanted concentrations as the various positions within the portfolio perform differently over market cycles. The Mexican traders who specify the target allocations between the asset classes and the types of instruments, who periodically reallocate their portfolio back toward target allocations regardless of recent performance, are engaging in an institutional practice which is always enhancing long-term risk-adjusted performance as compared to the portfolios that are just allowed to grow based on the recent performance. The psychological challenge of reducing exposure to recent winners and increasing exposure to recent underperformers is real, but the discipline of systematic rebalancing eliminates the discretionary judgement which makes such decisions challenging, and substitutes it with a rule which puts the same logic at work in different market environments and emotional states.

The investors in Mexico who have constructed genuinely diversified portfolios via CFD trading have generally reached that construction by a series of progressive development of focus on instruments rather than by comprehensive portfolio planning in the first place. The approach of building true analytical capability in those markets with familiar instruments then systematically spreading to the next group of assets as the initial capability is achieved creates more lasting diversification than trying to handle exposure to multiple instruments that are not well understood at the same time as the underlying capabilities that are necessary to be effectively used are not yet acquired. The same philosophy underlies that patient, sequential method of portfolio construction as is the case with successful long-term traders as opposed to traders whose ambition always exceeds their analytical growth.