Latin America exchange traded funds have had a rough go of things this year and that much is confirmed by the performance of the iShares Latin American 40 ETF (NYSEArca: ILF), which has tumbled more than 25% year-to-date.
Amid a corruption scandal at Petrobras (NYSE: PBR), Brazil’s state-run oil company, high interest rates, a rising current account deficit and slack economic growth, Brazil stocks and ETFs have languished. 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.
And there is more bad news for Brazil and Mexico due to the fact that financial services firms in those countries are seen as week.
“Mexican banks are undergoing an inflection point in credit demand with system-wide loan growth rebounding to 14.0% in August 2015, from a trough of 8.2% in October 2014. Based on our coverage of Mexican large banks, we forecast loan growth 15.1% yoy in 3Q15 (versus 14.2% in 2Q15), positive trends for NIM, mixed trends for opex and better NPLs, culminating in a 5.7% qoq increase in aggregated net income. For SME finance, we estimate group net income to increase 8.1%qoq in 3Q15 however, ROE should decrease -34 bps qoq to 20.8%,” said UBS in a note out Tuesday posted by Dimitra DeFotis of Barron’s.
Ongoing weakness in Brazilian and Mexican banks would be a drag on ILF because the $517.9 million ETF allocates over 80% of its combined weight to Brazil and Mexico. Additionally, financial services stocks are ILF’s largest sector allocation at a weight of 29.1%.
iShares Latin America 40 ETF
