The rally in Mexican stocks and related exchange traded funds could wane as the government cuts its 2014 outlook on poor export demand and a dip in consumer confidence after a tax hike.
The iShares MSCI Mexico Capped ETF (NYSEArca: EWW) was down 0.2% Friday. The ETF has increased 8.3% over the past three months.
The Finance Ministry downwardly revised Mexico’s growth forecast to 2.7% from 3.9% after the agency calculated a 1.8% expansion for the first quarter, compared to median estimates of 2.1%, Bloomberg reports.
“This is insufficient growth, less than what Mexico deserves and less than the potential we possess,” Deputy Finance Minister Fernando Aportela said in the article. “What we see ahead for the next three quarters are factors that strengthen the view that Mexico is entering a faster growth cycle.”
The central bank has lowered its 2014 growth forecast to 2.3%-3.3% this year from 3%-4% after consumer confidence declined to its lowest level in almost four-years after the new taxes took effect. [Mexico ETF Tries to Get Its Act Together]
Mexico’s economy expanded 1.1% last year, its slowest pace since the 2009 recession.
The government has increased spending by 13% over the first quarter and the central bank has kept rates unchanged at a record low 3.5% to help kick-start the economy.
Meanwhile, the Mexican peso currency has steadily strengthened to a five-month high against the U.S. dollar. The peso was trading around 12.87 per U.S. dollar.
While investors can hedge against currency risk with the recently launched Mexico hedged-equity ETF, the db X-trackers MSCI Mexico Hedged Equity Fund (NYSEArca: DBMX), the stronger peso would benefit a non-currency-hedged fund, like EWJ. DBMX has increased 4.8% over the past three-months. However, if the peso begins to depreciate against the U.S. dollar, investors could take a look at DBMX.
iShares MSCI Mexico Capped ETF
For more information on Mexico, visit our Mexico category.
Max Chen contributed to this article.