After several years of dismal performances, Latin America exchange traded funds are roaring back in 2016 and have actually been leaders of the emerging markets resurgence. Rebounding commodities prices and the weaker dollar are key reasons why Latin America ETFs are rebounding.
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. Earlier this year, Mexico’s central bank surprisingly raised rates to help prop up the peso.
Related: How Central Banks Affect LatAm 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.