In a year of strength for emerging markets equities, the iShares MSCI Mexico Capped ETF (NYSEArca: EWW), the largest ETF tracking stocks in Latin America’s second-largest economy, has been a relative laggard this year when measured against other single-country Latin America ETFs.
However, Mexican stocks and EWW are showing signs of snapping out of that slump. Poll numbers showing Democratic nominee Hillary Clinton pulling away from Republican challenger Donald Trump in the race for the White House are an obvious catalyst for EWW. Over the past month, the Mexico ETF is higher by more than 5%.
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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.
With Mexico’s economy showing signs of lethargy, investors were likely caught off guard by the rate hike as many market observers were expecting Mexico’s central bank to hold off on monetary policy changes until after the U.S. presidential election in November. Republican nominee Donald Trump is, in the eyes of some market observers, a potential negative for the Mexican peso.
[related_stories]If the peso gains more momentum, rate hikes could slow next year.
“If the Mexican peso continues to appreciate through the end of 2016, the Bank of Mexico may see an opening to raise interest rates more slowly in 2017 than in 2016,” according to a PNC note posted by Dimitra DeFotis of Barron’s.
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Trump has questioned NAFTA and free trade, vowed to add tariffs on Mexican imports, pledged to deport millions of undocumented immigrants and wanted to build a border wall to keep out Mexican immigrants, adding to price volatility in the Mexican peso in recent months. The peso was one of the most undervalued emerging market currencies in recent weeks and has acted as a bellwether of developing market sentiment to the likelihood of a Trump presidential win.
“Despite the ongoing weakness in the economy, we expect monetary policy to be tightened further. Our forecast is for interest rates to be hiked by a further 100 basis points over the next year, to 5.75%, with the next move likely to be a 50 basis-point increase at Banxico’s December policy meeting,” according to a Capital Economics note featured in Barron’s.
For more information on the Mexico ETF market, visit our Mexico category.
iShares MSCI Mexico Capped ETF (NYSEArca: EWW)
