Latin America exchange traded funds have been among the emerging world’s worst performers. Major reasons why include slumping commodities prices and spiraling currencies, the latter of which has been caused by speculation that the Federal Reserve will soon raise interest rates.
Though last bad than some of other Latin America single-country ETFs, the iShares MSCI Mexico Capped ETF (NYSEArca: EWW) has not been immune to the emerging markets downturn. However, some market observers believe Mexican stocks and the peso, which resides near record lows against the dollar, could rebound even if the Federal Reserve boosts rates.
Mexico is at risk as its reserve coverage ratio, or foreign exchange reserves divided by its funding gap, is just 1.6 years, which is less than the seven years of Russia, another oil exporter. Additionally, Mexico is constrained by its near-zero real interest rate, leaving little room to cut rates if its economy weakens.
According to JPMorgan Asset management, Colombia and Mexico are now members of the so-called fragile five group of emerging markets, edging out Brazil and India, reports Steven Johnson for the Financial Times.
The two Latin American countries, along with Turkey, South Africa and Indonesia, are seen as developing countries overdependent on volatile foreign investment flows. The original fragile five were among the worst off during the taper tantrum of 2013 when foreign investors pulled out of the emerging markets.
In the event of another taper tantrum event, Colombia and Mexico may be among the most exposed to a shift to safety. [Mexico Joins Fragile Five]
However, Mexico’s proximity to the U.S. could once again be an advantage if the Fed announces an interest rate hike Thursday.
“Mexico’s peso is next in line to receive a boost, say Credit Suisse Group AG and Toronto-Dominion Bank, which topped Bloomberg’s rankings for currency predictions in the second quarter. After tumbling to a record versus the dollar last month, the peso may find its feet as the nation’s central bank signals it plans to take policy cues from its U.S. neighbor,” reports Eshe Nelson for Bloomberg.
As an oil exporter, Mexico’s currency has been hit by the falling crude oil prices – ETF investors should keep in mind that while Mexico has a large oil industry, none of the country-specific ETFs include exposure to the sector.
iShares MSCI Mexico Capped ETF
