By now, many investors know that the iShares MSCI Mexico Capped ETF (NYSEArca: EWW) is sensitive to rhetoric from new President Donald Trump.
EWW, the largest exchange traded fund tracking Mexican equities, has been in the spotlight this week after Mexican President Enrique Pena Nieto canceled a meeting with Trump. That news sent the already beleaguered peso, one of last year’s worst-performing emerging markets currencies, tumbling. That is a slippery slope for EWW because the Mexico ETF does not hedge currency risk.
To its credit, EWW climbed more than 6% last week, bringing it positive on a year-to-date basis. 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.
However, some investors believe Mexican stocks still offer value, particularly for investors willing to be patient with EWW.
“Trump targeted Mexico with various measures, and some emotive rhetoric. High level proposals included renegotiating NAFTA, imposing tariffs on Mexican imports, and, most controversially, building a border wall to keep Mexican immigrants out,” according to a Seeking Alpha analysis of EWW.
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 Deutsche 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.
Other issues linger, but so does opportunity.
“EWW has been re-pricing along with the peso, initially due to weak global economic conditions as manifested by oil prices, but since the election mainly due to the perceived impact of Trump policy. Mexico is indeed highly dependent on exports, with 35% of GDP emanating from export revenues, compared to just 8% for the U.S. The beneficial impact of the uptick in oil prices (Mexico remains a net oil exporter) and improving global growth has been ignored,” adds Seeking Alpha.
For more information on the Mexican markets, visit our Mexico category.