Shares of the iShares MSCI Mexico Capped ETF (NYSEArca: EWW) surged 3.8% yesterday on volume that was about 50% above the 90-day trailing average after Mexico’s central bank surprisingly raised interest rates in a bid to stem the peso’s lengthy slump.
“Banxico raised its interbank borrowing rate by 50 basis points to 3.75% in a surprise move Wednesday. While the yield on local 10-year bonds was flat at near 6%, the peso rallied against the dollar, and the Mexican stock market is higher, having recovered from initial losses,” reports Dimitra DeFotis for Barron’s.
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.
“Stabilising the currency [the Mexican peso]over the longer term will ultimately depend on whether oil prices bottom out and sentiment towards emerging markets improves. We suspect it will. But the policy tightening today will weigh on the real economy too. We’ve marked down our GDP growth forecast for this year from 3% to 2.5%,” according to a Capital Economics note posted by 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.
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
