The iShares MSCI Mexico Capped ETF (NYSEArca: EWW) is down 5.4% this year as the lone dedicated Mexico exchange traded fund has been pressured by the slumping peso, prompting investors to make EWW the worst Latin America single-country ETF in terms of lost assets to start 2016.
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.
“Data show Mexico’s private consumption fell by a seasonally-adjusted 0.2% month-over-month in November, implying the annual rate of change slowed. But using data not adjusted for seasonal factors, private consumption increased 3.9% year over year as expected, and that was the fastest rate in five months,” reports Dimitra DeFotis for Barron’s, citing Citigroup research.
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. Rather, EWW is heavily allocated to defensive sectors, such as consumer staples and telecom.
“We estimate that private consumption grew by 3.6% year over year in the fourth quarter of 2015 versus 2.9% in the third quarter, thus driving GDP growth … the [November] results point to a halt in the uptrend of private consumption spending in the final quarter of 2015, although we have estimated that it grew … leading to 3.1% growth in 2015 as a whole, faster than our GDP forecast (2.5%) for that year. Looking forward, we estimate that consumption will continue to grow healthily in coming months on the back of gains in formal employment, real wages, remittances and consumer credit,” according to the Citi note posted by Barron’s.
iShares MSCI Mexico Capped ETF
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.