The iShares MSCI Mexico Capped ETF (NYSEArca: EWW) is down more than 8% year-to-date, but compared to other exchange traded funds tracking Latin American economies, EWW’s showing is significantly less bad. In fact, EWW is the only Latin America single-country ETF that has traded higher over the past five years.
Colombia and Mexico, 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. Additionally, there are some sectors of the Mexican equity well-positioned to thrive.
In a note out earlier this week, UBS said investors should avoid Mexico on a broad basis, but the bank was constructive on Mexican consumer staples and financial services names, reports Dimitra DeFotis for Barron’s.
The $1.39 billion EWW allocates over 45% of its combined weight to financial services and consumer staples names. Those are the ETF’s two larges sector weights.
“Our strategy recommendation: overweight staples and financials and underweight the rest of the market. Risks to our bearish view include strengthening of the Mexican Peso, commodity prices rebounding and acceleration of economic growth,” Barron’s reports, citing UBS.
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.
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
