The iShares MSCI Mexico Capped ETF (NYSEArca: EWW), the largest exchange traded fund dedicated to Mexican equities, is up nearly 21% year-to-date. That is an undoubtedly impressive performance when considering many market participants expected Mexican stocks to slide with Donald Trump in the White House.
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.
Some market observer see risks for Mexican stocks.
“Although [Mexico’s] GDP grew 2.8% year on year in the first quarter of the year, the breakdown from the demand side shows that domestic expenditure is decelerating. The main driver of growth from the demand side was exports’ growth. Private consumption slowed down and government consumption and investment contracted. Looking at monthly data to get a better picture of aggregate expenditure, retail sales contracted 1.3% month on month, seasonally adjusted, in March, and as the real wage mass growth continues to decelerate, consumption will likely weaken in coming quarters. Investment remains flat overall with construction slowing down, despite a positive surprise in March,” according to a Merril Lynch Mexico note posted by Dimitra DeFotis of Barron’s.
EWW holds 61 stocks and trades at valuations above those found on the MSCI Emerging Markets Index. The ETF allocates almost a third of its weight to consumer stocks, highlighting its domestic focus, but reminding investors the fund serves as a play on Mexico’s local economy as well as being an export story.
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.
“Consumption continues to grow defying, once again, expectations of a pronounced deceleration. In the first quarter of the year consumption increased 2.8% qoq saar. But that is already some deceleration from the 3.2% qoq saar pace of 4Q 2016 and an even more pronounced deceleration from 6.4% qoq saar in 3Q 2016. Furthermore, using monthly data from private consumption to retail sales it is clear that the level of consumption is flattening (Chart 2). So the rates of growth are masking further deceleration at the margin,” according to the Merrill Lynch Mexico note seen in Barron’s.
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