This year, the iShares MSCI Mexico Capped ETF (NYSEArca: EWW), which holds broad range of companies in Mexico, has seen its fortunes largely tied to politics. U.S. politics that is and to be more specific, the presidential election.
Put simply, EWW, Mexican stocks and the peso have been rising in unison with Democratic challenger Hillary Clinton’s polls numbers and fall when it appears Republican contender Donald Trump has some momentum. Year-to-date, EWW is up 2.8%, a performance that significantly lags those of broader emerging markets and Latin America exchange traded funds.
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Conventional wisdom might dictate that EWW and Mexican stocks would be likely to rally should Clinton emerge victorious on Election Day, an outcome that is looking increasingly likely if recent polls numbers prove accurate. However, that rally could be short-lived and EWW could be left without a catalyst once Trump fades from the U.S. political scene.
“Unfortunately, investors who blinked during this rally have probably missed it. A Trump defeat is largely priced in, analysts and investors say, with Mexican assets returning to less-bullish drivers: depressed oil earnings, rising current-account deficits, high equity multiples, and a blazing hot streak for its main investment competitor, Brazil,” reports Craig Mellow for Barron’s.
[related_stories]Since EWW does not hedge currency risks, a strengthening peso currency would further bolster returns – an appreciating peso would translate to higher U.S. dollar-denominated returns. The peso has displayed an inverse correlation to Trumps poll numbers.
Additionally, Mexican markets were supported by optimism that the Organization of Petroleum Exporting Countries and other large crude oil producers would limit production. Mexican assets have been weighed down by the plunge in oil prices, which raised concerns about the government finances and triggered negative outlook on the country’s credit rating.
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Investors mulling positions in EWW should be mindful of Mexico’s central bank and its plans for interest rates.
Although Mexico’s central bank said the first rate hike earlier this year was not the start of a new tightening cycle, the central bank surprised global investors Thursday when it boosted borrowing costs by 50 basis points to 4.75%, which is good for the country’s highest interest rate since 2009.
“Mexico has matured into something like the grown-up in an emerging market room full of volatile adolescents. Manufacturing growth and intelligent price hedging have cushioned the effects of the 2014 oil price collapse, keeping GDP growth steady between 2% and 2.5% for nearly three years now,” according to Barron’s.
For more information on the Mexican markets, visit our Mexico category.
iShares MSCI Mexico Capped ETF (NYSEArca: EWW)
