By now, many investors know that few, if any, exchange traded funds were adversely affected by Donald Trump’s surprise victory in last week’s U.S. presidential election on par with the iShares MSCI Mexico Capped ETF (NYSEArca: EWW).
EWW, the largest ETF tracking stocks in Latin America’s second-largest economy, has plunged more than 15% over the past week as investors have fretted that Trump will move forward with plans to build a wall around the U.S./Mexico border while possibly looking to unwind the North American Free Trade Agreement (NAFTA).
With the peso also sliding in the wake of Trump’s win, the Mexico’s central bank could move forward with more rate hikes to stem the currency’s slide. 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 last month when it boosted borrowing costs by 50 basis points to 4.75%, which is good for the country’s highest interest rate since 2009.
The Mexican peso experienced its worst two-day loss in 22 years as investors worried about how U.S. president-elect Trump’s policies could affect exports from our Southern neighbor, reports Michael O’Boyle for Reuters.
Citigroup strategist Dirk Willer believes the bloodletting hast just started and the peso currency could weaken to 22 per dollar
[related_stories]Still, some see opportunity for long-term investors with EWW and Mexican stocks.
“The result is a six-sigma event, with the peso currently undervalued by around 50% relative to its long term mean deviation from the purchasing power parity rate, which puts the Mexican currency back at a level not seen since the depths of the Tequila crisis,” according to a Gavekal Research note posted by Dimitra DeFotis of Barron’s. “The difference now is that Mexico’s fundamentals are relatively healthy, certainly compared to 1994 when the country was effectively bankrupt. In other words, the worst case scenario—and more—is currently in the price.”
SEE MORE: ETF Winners and Losers of President-Elect Trump
Investors who believe the Mexican peso may continue to depreciate but anticipate the markets will improve can look to currency-hedged ETF strategies to diminish the currency risks. For instance, the db X-trackers MSCI Mexico Hedged Equity Fund (NYSEArca: DBMX) and the recently launched iShares Currency Hedged MSCI Mexico (NYSEArca: HEWW) provide exposure to the Mexico’s market without the added currency risk of a depreciating peso currency.
For more information on the Mexico ETF market, visit our Mexico category.
iShares MSCI Mexico Capped ETF (NYSEArca: EWW)
