ETF Trends
ETF Trends

The iShares MSCI Mexico Capped ETF (NYSEArca: EWW) surged more than 17% in the first quarter, easily outpacing the MSCI Emerging Markets Index to rank as one of the quarter’s best-performing single-country emerging markets exchange traded funds.

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.

Still, perhaps due in large part to its proximity to the the U.S., Mexico is often viewed as one of the safer emerging markets for investors, but some data points suggest otherwise.

“In fact, the scores for Hungary, Turkey, Brazil and Russia for the same risk factor are lower than they are for India, and all four countries are below India in the global rankings, making them all riskier prospects, with Russia eight points worse off on the gamut of risk metrics,” according to Euromoney. “Mexico admittedly fares better in the rankings, holding onto 37th place, on a score of 60.5 points, but is still eclipsed by Chile, on 75.5 points in 16th place, which is only marginally behind the US.”

Although Chile is viewed by some market observers as the most advanced and open South American economy and it is undeniably home to Latin America’s highest sovereign credit rating (AA-), there is also no denying the country’s dependence on copper exports as a driver of government revenue.

“Here again, Chile’s monetary policy/currency stability score exceeds Mexico’s. The Mexican peso, like the rand, is considered undervalued – and has been gaining,” reports Euromoney. “ECR data underscore the comparatively favourable prospects of Chile relative to Mexico, which have been improving on the back of higher Chinese and US demand supporting copper prices.”

The peso is an important part of the Mexico investment thesis because exports account for over a third of GDP in Latin America’s second-largest economy. So are oil prices because Mexico is one of the largest non-OPEC producers in Latin America.

For more information on the Mexican markets, visit our Mexico category.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.