After being punished in 2016 on speculation that Donald Trump could find his way to the White House, the iShares MSCI Mexico Capped ETF (NYSEArca: EWW) is shaking off the “anti-Trump trade” jitters and is up more than 18% year-to-date, making it one of 2017’s best-performing single-country emerging markets ETFs.
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.
“Since Donald Trump’s win in November, Mexico has offered investors a roller-coaster ride. The Mexican peso fell more than 15% between November and inauguration in January, while the Mexican stock market fell almost 5% during that same period. Before taking office, Trump said he would renegotiate or withdraw from the North American Free Trade Agreement, impose a “large border tax” on firms producing manufacturing goods outside the U.S. but that sell them on the U.S. market, and construct a wall on the border of Mexico,” according to Morningstar.
The $1.5 billion EWW, which debuted in March 1996, holds 62 stocks. The ETF allocates 45% of its lineup to consumer staples and financial services names. Materials and telecom stocks combine for almost 31% of the ETF’s weight.
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.
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.
“Given valuations today, many investors are simply holding on to their Mexican positions, waiting for more clarity from the U.S. administration on trade and immigration policies–or for a market correction that would bring down valuations,” according to Morningstar.
For more information on the Mexican markets, visit our Mexico category.