Tests Remain For Mexico ETF

Even amid fears surrounding the North American Free Trade Agreement (NAFTA), the iShares MSCI Mexico Capped ETF (NYSEArca: EWW), the largest ETF dedicated to Mexican equities, is up about 3% this year.

Still, some tests linger for Latin America’s second-largest economy. Speculation is swirling about the U.S. and its place in NAFTA with some market observers assessing the possibility of the U.S. withdrawing from the free trade accord. That move is potentially devastating for Mexico’s economy.

“Mexican macroeconomic and fiscal data from 4Q17 were in line with Fitch’s expectations for a continuation of moderate growth and improvements in fiscal and external accounts,” said Fitch Ratings. “Growth reaccelerated after falling below 2.0% in 3Q17, helped by higher oil prices, strong manufacturing exports and recovery from earthquakes. Similarly, external accounts displayed resilience, with exports growing by 9.5% and the non-oil trade balance recording a surplus.”

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.

“While Mexico’s growth trend should remain stable in 2018, challenges preventing a significant acceleration in GDP growth will remain,” said Fitch. “The uplift from falling inflation and robust external, primarily US, demand is countered by subdued investment amid ongoing concerns about the future of NAFTA and the 2018 elections along with ever tighter monetary policy. The Central Bank raised its policy rate by another 25bps to 7.5% during its February 2018 meeting. This should keep 2018 growth broadly in line with the 2017 outturn, in our view.”

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. However, oil output in Mexico is expected to decline this year.

For more information on the Mexican markets, visit our Mexico category.