On Thursday, which, coincidentally, was also Cinco de Mayo, Mexico’s central bank left interest rates unchanged. The central bank in Latin America’s second-largest economy had to the room to be somewhat accomodative as rebounding commodities price have helped the once downtrodden peso bounce back this year.
Up 11.1% over the past 90 days, the iShares MSCI Mexico Capped ETF (NYSEArca: EWW) is rebounding as well. The iShares Latin American 40 ETF (NYSEArca: ILF), which features Mexico as its second-largest geographic weight, is rebounding as well.
Latin America’s central bank policies are notable, at least among the region’s two largest economies, Brazil and Mexico. Although Brazil’s central bank has not hiked interest rates since last year, its benchmark borrowing cost of 14.25% is among the highest in the world, emerging or developed markets.
Related: Low U.S. Interest Rates Boost International Dividend ETFs
Earlier this year, Mexico’s central bank surprisingly raised rates to help prop up the peso.
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.
However, some market observers are enthusiastic about Mexico’s long-term prospects as the country aims to be home to one of the world’s 10 largest economies.
[related_stories]“If the U.S. economy grows, Mexico’s economy is riding shotgun. If the U.S. economy sputters, Mexico’s economy tumbles. Nearly 80% of Mexico’s exports are destined for U.S. markets and half of those exports are higher value products like vehicles and electronic goods as parts of the country continue climbing up the value chain. Rising flows of U.S. natural gas to its southern neighbor provide Mexico with cheaper and cleaner fuel to expand the electric grid and support a growing manufacturing base,” according to MarketWatch.
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.
Related: Investors Look to Dividend-Paying Stock ETFs as Interest Rates Stay Low
Still, Mexico has some work to before making bigger economic gains.
“Mexico may be the 15th-largest country in the world by gross domestic product and the 11th-largest by purchasing power parity, but institutional decay, corruption, a poor education system and depressed wages have fueled a cycle of the rich getting richer and the poor disappearing more and more into a silent majority,” adds MarketWatch.
For more information on the Mexico ETF market, visit our Mexico category.
iShares MSCI Mexico Capped ETF
