Overall, emerging markets stocks and exchange traded funds have disappointed investors once again in 2014, but Latin American offerings have been particularly egregious offenders. That trend may not change in 2015.
“Jorge Kuri, Morgan Stanley’s director of equity research for Latin America, writes that his team’s forecast calls for a 10% decline in returns on a dollar-denominated basis for the region’s equities by year-end 2015,” reports John Kimelman for Barron’s.
That would mark a sixth consecutive year of under-performance by Latin American stocks relative to broader emerging markets benchmarks. This year, the iShares Latin American 40 ETF (NYSEArca: ILF) has lost 14%, more than double the 6.4% drop for the iShares MSCI Emerging Markets ETF (NYSEArca: EEM). Worse yet, ILF’s relative strength against EEM has been deteriorating. [Looking at Lagging LatAm ETFs]
Underscoring just how bad things have been for LatAm ETFs this year are the dreadful performances turned in by the single-country funds tracking the region. The Global X MSCI Argentina ETF (NYSEArca: ARGT) is the best performer of the six LatAm single-country ETFs with a year-to-date loss of 3.1% while the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) and the iShares MSCI Mexico Capped ETF (NYSEArca: EWW), the two largest country-specific ETFs tracking LatAm equities, are down an average of 13.7%.
Morgan Stanley is overweight Mexico, but underweight Brazil, according to Barron’s. It is worth noting that earlier this year Mexico’s central cut interest rates to support Latin America’s second-largest economy and Daniel Loeb, head of Third Point, recently sounded a bullish tone about Mexican stocks. [Mexico ETF Merits Attention]
However, due to its large allocations to defensive consumer staples and telecom names, EWW carries with a P/E ratio that is well in excess of EEM’s. Investors have pulled $19 million from EWW this year despite optimism regarding the country’s reform-minded government and efforts to open the country’s energy industry to foreign investment for the first time in decades.
Although EWW does not feature a large energy sector weight, the ETF’s vulnerability to low oil prices is unmistakeable because among non-OPEC producers, only Russia depends on oil for a greater percentage of government revenue than does Mexico. Not surprisingly, EWW has lost nearly 13% over the past three months while the United States Oil Fund (NYSEArca: USO) is off 39.6% over the same period.
iShares MSCI Mexico Capped ETF
Tom Lydon’s clients own shares of EEM and ILF.