Scores of single-country exchange traded funds are being affected by central bank policies this year. Count the iShares MSCI Mexico Capped ETF (NYSEArca: EWW), the largest ETF tracking stocks in Latin America’s second-largest economy, among that group.
Earlier this year, Mexico’s central bank surprisingly raised interest rates in a bid to halt the peso’s slide, a decline that was worsened by Brexit. 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: How Central Banks Affect LatAm ETFs
As an oil exporter, Mexico’s currency was previously dragged lower 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.
With Mexico’s economy showing signs of lethargy, investors should not expect another rate hike in the near-term. In fact, the central bank there said the rate hike earlier this year probably would not be the start of an overt hawkish cycle.[related_stories]
“The economy is slowing down. In fact, we recently lowered our GDP forecasts for this and next year. Mexico’s growth is decelerating and it is now expanding below potential growth (which we estimate to be between 2.5% and 3.0%). The preliminary Q2 GDP quarterly number was negative for the second time since only 2009, heralding the possibility of economic deceleration,” according to a Nomura note posted by Johanna Bennett of Barron’s.