Latin American equities and the relevant exchange traded funds trading in the U.S. have been among the most severely punished emerging markets assets since 2014. Brazil, the region’s largest economy, is a big reason why and the struggles of the Brazilian economy underscore why investors daring enough to explore Latin America should prefer Mexico and the iShares MSCI Mexico Capped ETF (NYSEArca: EWW) over Brazil.
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 Federal Reserve continues hiking interest rates this year.
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. However, Mexico’s commodities exposure has not punished EWW as harshly as falling commodities prices have done to the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ).
Multiple factors are dragging on the Brazilian economy. Unemployment rose to 7.9% in September from 4.7% in October last year. Inflation has jumped over 10% for the first time since 2002. The budget deficit has widened to 9.5% of GDP. Additionally, lower commodity prices, diminishing consumer credit boom and a corruption scandal at state-run oil giant Petroleo Brasileiro have all weighed on the economy. [Corruption Probe Plagues Brazil ETF]
Over the past 12 months, EWW is down 23.6% compared to a loss of 50.6% for EWZ.
“Although Mexico also has a twin deficit (current account deficit and fiscal deficit), it is improving, while Brazil’s twin deficit now exceeds more than 10% of its GDP. Falling commodity prices are not a positive for Mexico, but the government has been proactive in hedging its oil revenues, which provides support for fiscal spending. We also saw stronger-than-expected consumer activity during the second half of 2015. Remittances from Mexicans working in the U.S. have been robust, benefitting from a weak peso and the country’s close ties to the improving U.S. economy. The industrial sector is also adding more jobs, with increased “re-shoring” activity in the auto and aerospace industries,” according to a Calamos note posted by Dimitra DeFotis of Barron’s.
iShares MSCI Mexico Capped ETF
