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]
However, Mexico’s proximity to the U.S. could once again be an advantage if the Fed announces an interest rate hike next month.
“We think that the central bank will leave the overnight rate unchanged at 3.0% in [Monday’s] monetary policy meeting; the decision is due at 2 p.m. EDT. … the bank will likely state that the balance of risks to Mexico’s growth and inflation has remained unchanged since the previous meeting. Still, the bank will likely reiterate that inflation has been below expectations, that inflation expectations have remained unchanged and that the pass-through to inflation from currency weakness has been limited. The bank will also likely mention that further episodes of peso weakness are the main risk to inflation and that it will continue to monitor closely the behavior of local financial markets,” said Credit Suisse in a note posted by Dimitra DeFotis of Barron’s.
Although it has no energy sector exposure, EWW has been dragged lower by falling oil prices because Mexico is one of Latin America’s largest crude producers.
iShares MSCI Mexico Capped ETF
