After being punished last year amid speculation Mexico’s economy and markets would be vulnerable to Donald Trump’s presidency, the iShares MSCI Mexico Capped ETF (NYSEArca: EWW), the largest exchange traded fund dedicated to Mexican equities, is one of this year’s best-performing emerging markets single-country ETFs.
Up more than 30% year-to-date, EWW faces some new challenges with the start of the North American Free Trade Agreement (NAFTA) negotiations this week. EWW tries to reflect the performance of the MSCI Mexico IMI 25/50 Index, which does not hedge its currency risks. Consequently, a strengthening peso has translated to an improved U.S.-dollar denominated return for EWW investors.
“The risk of a disruptive outcome from NAFTA renegotiations for the Mexican economy has fallen recently, and we assume that an eventual deal is unlikely to seriously undermine Mexican access to the US market, Fitch Ratings says. NAFTA-related uncertainty may still weigh on growth, but some aspects of renegotiation could present medium-term opportunities,” said Fitch Ratings in a recent note.
In June, the U.S. and Mexico reached an accord to end disputes over the sugar trade between the two countries. 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.
“The final outcome is unknown, but the risks to the Mexican economy from renegotiation appear to have diminished recently,” according to Fitch. “As recently as April, President Trump said he was still considering withdrawal from NAFTA, and there is still scope for unanticipated changes in the administration’s trade policy. But objectives published by the US Trade Representative last month, while reiterating the desire to reduce the US trade deficit with NAFTA countries, included maintaining mutual tariff-free access for industrial goods as a priority aim. They also suggest that the US is less likely to try to use rules of origin to restrict Mexican access to the US market.”
Related: Formerly Dumped on Trump, Mexico ETF Now a Darling
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.