By now, many investors know that the iShares MSCI Mexico Capped ETF (NYSEArca: EWW) is sensitive to rhetoric from new U.S. President Donald Trump, but give the largest Mexico exchange traded fund some credit.
After ranking as one of last year’s worst-performing single-country emerging markets ETFs at a time when emerging equities rebounded, EWW has improved dramatically this year. With emerging markets stocks again surging, EWW is joining that party with a year-to-date gain of 14.6%. However, some market observers believe the Mexico ETF could be due for a near-term retreat.
“While many were calling for a Mexican crash following the U.S. election, it seems that the country adjusted rapidly to the threat coming from its northern neighbor. Mexican assets de-rated sharply after the election – both in local and U.S. dollar terms – but have come back strongly since then. With the peso back to its pre-election value against the U.S. dollar, today’s note recommends to take an extra breather over Mexican assets until we get more clarity on the country’s newly found relationship with the United States,” according to a Strategy-Pavilion Global note posted by Dimitra DeFotis of Barron’s.
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. Mexico is Latin America’s second-largest economy behind Brazil. The good news for investors consider EWW is that President Trump, to some extent, has back-pedaled from some of his harsher campaign rhetoric aimed at Mexico.
“Mexican exports have shown impressive growth following the post-election depreciation of the peso. … That said, while the country’s export sector benefited from the weakening of the MXN and its access to the U.S. market under the current NAFTA deal, it remains vulnerable as the U.S. and Mexico plan to re-open trade discussions in mid-2017,” according to the Strategy-Pavilion Global note seen in Barron’s.
For more information on the Mexican markets, visit our Mexico category.