While the majority of May was focused on the U.S.-China trade war, June brings a new opponent to the tariff-for-tariff battle in Mexico, and this paves the way for Mexico-specific and Latin America-focused exchange-traded funds (ETFs) in play.
U.S. President Donald Trump turned his attention to Mexico in the latest tariff wars by announcing a 5 percent tariff on all Mexican imports, which will begin on June 10. The move came as Trump urged Mexico to “reduce or eliminate the number of illegal aliens” entering the U.S.
Late last year, border wall funding has been a topic of contention in Congress after the U.S.-Mexico border situation escalated as the number of migrants heading into Mexico from Central America multiplied exponentially while attempting to seek asylum within the U.S. The number of those applying for asylum legally outweighs the number of immigration officials that can process the requests, causing a situation in Mexico where the country could be overrun by overcrowded migrant camps and shelters.
Now, this topic comes back to the forefront.
“If the illegal migration crisis is alleviated through effective actions taken by Mexico, to be determined in our sole discretion and judgment, the Tariffs will be removed. If the crisis persists, however, the Tariffs will be raised to 10 percent on July 1, 2019,” the White House said.
“Tariffs will be increased to 15 percent on August 1, 2019, to 20 percent on September 1, 2019, and to 25 percent on October 1, 2019,” it added. “Tariffs will permanently remain at the 25 percent level unless and until Mexico substantially stops the illegal inflow of aliens coming through its territory.”
Mexico and Other ETFs in Play
ETF investors who see a possible trade brewing in the newest U.S.-Mexico trade saga can look to ETFs like the iShares MSCI Mexico Capped ETF (NYSEArca: EWW) or for more juice, the Direxion Daily MSCI Mexico Bull 3X ShsETF (NYSEArca: MEXX). Following the announcement of the latest tariffs, EWW fell 3.64 percent while the triple leverage of MEXX meant losses were over 12 percent.
“So far Mexico isn’t exactly rolling over to Trump’s demands. President Andrés Manuel López Obrador posted an open letter to Trump yesterday (last Thursday), which the New York Timesp ortrayed as conciliatory because it sought to avoid ‘confrontation’ and called for ‘dialogue,'” wrote Donald Luskin of Trend Macro Investment Strategy in their latest report. “The Times left out the letter’s zingers such as: ‘America First’ is a fallacy.”
However, investors who can sense an opportunity in the pullback can try their hands at those ETFs. EWW is up roughly 8 percent for the year.
In the meantime, the U.S.-China trade impasse paved the way for discounts in a lot of U.S. equities, but it also put the red tag sale in the emerging markets (EM) space. With the latest U.S. move against Mexico, one corner of EM that investors may not have considered is within Latin America.
While most investors might have been driven away by the losses in EM during much of 2018, savvy investors who were quick to see the opportunity viewed EM as a substantial markdown. From a fundamental standpoint, low price-to-earnings ratios in emerging markets ETFs have made them prime value plays as capital inflows continue in 2019.
EM can also provide opportunities for dividend-seeking investors. Latin America, once again, could be an alternative investors may not have yet taken into consideration. For a Latin America-specific ETF trade, consider the Direxion Daily Latin America Bull 3X ETF (NYSEArca: LBJ).
LBJ seeks daily investment results equal to 300% of the daily performance of the S&P Latin America 40 Index. The index itself is a float-adjusted market capitalization weighted equity index of issuers drawn from five major Latin American markets: Brazil, Chile, Columbia, Mexico, and Perú.
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