As highlighted by a nearly 26% year-to-date decline for the iShares Latin American 40 ETF (NYSEArca: ILF), 2015 is proving to be another rough year for Latin American stocks. Shares of ILF are now down almost 41% over the past year as Latin America has been arguably the weakest spot in the already weak emerging markets complex.
Compared to ILF and some other Latin America single-country ETFs, the iShares MSCI Mexico Capped ETF (NYSEArca: EWW) has been sturdy, losing less than 10% this year. 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]