Plenty of emerging markets exchange traded funds have been dented by geopolitical volatility this year, including the iShares MSCI Mexico Capped ETF (NYSEArca: EWW).

The election of Andres Manuel Lopez Obrador (AMLO) as Mexico’s newest president was initially cheered by markets, but investors have recently expressed some pause about the new president’s policies. EWW, the largest US-listed Mexico ETF by assets, is sporting a fourth-quarter loss of nearly 20% and is down almost 17% this year.

EWW seeks to track the investment results of the MSCI Mexico IMI 25/50 Index, which is a free float-adjusted market capitalization-weighted index with a capping methodology applied to issuer weights so that no single issuer of a component exceeds 25% of the underlying index weight, and all issuers with a weight above 5% do not cumulatively exceed 50% of the underlying index weight.

Obrador’s proposed moves include a push to limit the fees banks can charge customers as well as a decision to end a $13 billion airport project in Mexico City that already raised funds via overseas bonds. Investors were always suspect of Obrador’s penchant for effecting business-friendly policies, but the most recent moves sent investors on an EWW selling frenzy.

What’s Next

“Policy uncertainty remains elevated following the Mexican elections. Andres Manuel Lopez Obrador’s decisive victory as president has given his administration a clear mandate for change, and he has congressional backing to enact reforms,” said BlackRock in a recent note. “However, after AMLO cancelled the Mexico City airport project, investors are reconsidering just how significantly policy could shift.”

Mexico’s recent change in leadership saw the controversial leftist candidate AMLO become its next president for the next six years as the 65-year-old firebrand has been referred to as the country’s version of U.S. President Donald Trump. That relationship with the very individual he was compared to will be tested as U.S.-Mexico relations regarding the border situation have become tenuous.

“Top of mind is the risk of deteriorating fiscal discipline, as fiscal health is needed to maintain sovereign ratings and support domestic and external confidence,” said BlackRock. “Absent policy errors, Mexican assets look reasonably attractive. Analysts currently expect 16% earnings growth in 2019 and USD/MXN and equity valuations appear quite cheap.”

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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.

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