Energy Reform May Benefit Mexico ETF, but Indirectly

August 14th at 8:00am by Tom Lydon

On Monday, Mexican President Enrique Pena Nieto unveiled his plan to open his country’s energy industry to foreign investment. The plan, while widely expected, has not provided an immediate boost to the iShares MSCI Mexico Capped ETF (NYSEArca: EWW), the lone ETF exclusively devoted to Latin America’s second-largest economy.

Part of EWW’s lack of reaction to the news can be tied to that fact PEMEX, Mexico’s state-controlled oil company, unlike its Brazilian or Colombian equivalents Petrobras (NYSE: PBR) and Ecopetrol (NYSE: EC) in the ETFs tracking those countries, is not a dominant part of EWW. PEMEX is not part of EWW at all. [Mexico ETF Boosted by Soaring Economy]

Another reason EWW has not shot to the moon simply because Nieto wants to open Mexico’s energy industry is because he is not the first Mexican leader to attempt to do so. Several of his predecessors have tried, and failed, due in part to negative feelings toward foreign oil companies held by ordinary Mexican citizens and their feelings that PEMEX is their company.

“The cultural bias against foreign oil companies is heavily ingrained in the Mexican psyche, and past congresses that have considered such offerings from Mexican chief executives have always found themselves under great public pressure to vote against them,” reports David Blackmon for Forbes.

Mexico, long Latin America’s second-largest oil producer behind OPEC member Venezuela, nationalized its oil industry 75 years ago. However, the country’s production has steadily declined in recent years. That is not good for the government nor its citizens because PEMEX accounts for a significant portion of government revenue in a country where tax evasion is prevalent. At current output rates, Brazil will soon pass Mexico as the region’s second-largest oil producer.

Getting back to EWW, the ETF offers no direct energy sector exposure. Consumer staples and telecom names combine for over 43% of the fund’s weight, explaining why EWW trades at a premium to the broader emerging markets universe and why the fund has yet to benefit from Nieto’s de-nationalization plan. [Bargain Hunting Among Emerging Markets ETFs]

Opening Mexico’s energy industry to foreign investment could benefit EWW by boosting the country’s GDP. Capital Economics “thinks a successful reform though could add 0.3% to annual GDP growth over the next decade and eventually increase tax revenues by about 2% GDP, making it an over-performer in Latin America,” reports Shuli Ren for Barron’s.

According to Barron’s, Credit Suisse identified Grupo Carso and Grupo Mexico as possible beneficiaries of an open Mexican energy industry. Those stocks combine for 6.5% of EWW’s weight.

iShares MSCI Mexico Capped ETF

ETF Trends editorial team contributed to this post.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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