The iShares MSCI Mexico Capped ETF (NYSEArca: EWW) has traded slightly lower over the past month, but on a year-to-date basis, the lone dedicated Mexico exchange traded fund has been significantly less bad than diversified emerging markets offerings and other Latin America ETFs.
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.
However, there are reasons to believe that Mexico could be perhaps the most reliable Latin American investment destination in 2016. Mexico’s proximity to the U.S. could once again be an advantage if the Fed announces an interest rate hike this month.
“Private economists surveyed by the Bank of Mexico raised growth expectations for 2015 to 2.44% from a previous 2.29%, a shift that came after the country reported 3% GDP growth in the third quarter,” reports Dimitra DeFotis for 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.
“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.
“To be sure, Mexico isn’t surging. The new full-year forecast sits well below the 5% target set by President Enrique Peña Nieto, and at 2.74%, growth forecasts for 2016 remain unchanged. Still, Mexico is growing thanks to employment growth and record-low inflation. In fact, two-thirds of the economists surveyed by Mexico’s central bankers said the economy is stronger than it was a year ago,” adds Barron’s.
iShares MSCI Mexico Capped ETF
