By ETF Heat Map Team
The Organization for Economic Co-operation and Development (OECD) reported that Mexican GDP growth is expected to increase to 3% in 2017 with the help of government sponsored structural reforms despite lower oil prices and slightly reduced foreign demand for Mexican exports. Economies around the world have slowed down, and investors are expecting a slow but gradual global economic recovery. The Mexican economy is no exception to the rule.
However, what is helping Mexico’s situation is increased domestic demand. The Mexican consumers rising demand and ability to purchase local goods helps to strengthen Mexican businesses and service providers during a global slowdown. Mexican firms can improve sales numbers by catering to Mexican consumers in addition to serving their foreign customers. Exports remained fairly strong due to the previous strategic depreciation of the peso which helped Mexico make gains in the total share of global market exports.
With the peso near record lows and with the aim of meeting inflation expectations, the Bank of Mexico (BOM) increased their overnight rate by 50 basis points last week to 4.75%. The BOM noted that the increase is not the start of a formal “rate hike cycle.” Analysts are expecting external events such as the U.S. election to potentially have an impact on the value of the peso and the Mexican economy overall. The exact extent of change is not yet known.
A win by U.S. presidential candidate Donald Trump, who is seen to be in favor of U.S. protectionist policies and is against free trade with countries such as Mexico, would have a different impact on the U.S. and Mexico’s trade relationship compared to if Hillary Clinton were to get elected. Investors should consider the impact of the U.S. presidential election later this year. It has been reported that whenever the probability of winning by the xenophobic candidate Donald Trump increases, the value of the iShares EWW ETF decreases. If Hillary Clinton wins the election, then investors that go long on the EWW ETF may benefit in the long run. Michael Shaoul, CEO of Marketfield Asset Management, reported in Barron’s that, “Mexico has become a favored macro short, in part to hedge other EM currency exposure that is either too expensive due (Brazil) or illiquid.”
Investors can take either a long or short positions based on their investment thesis about the future of Mexican firms by purchasing ETFs that provide exposure to the Mexican market place.
The iShares MSCI Mexico Capped ETF, listed as EWW, is composed of a broad range of Mexican equities and has an expense ratio of 0.48%. Investors are taking both long and short positions on the EWW based on their outlook.
During these uncertain times, it is hard to know what the future of Mexico will look like. The OECD in their recent June 2016 country report on Mexico wrote that, “There are signs of productivity pick-up. Key structural reforms, notably measures to foster competition in network industries and to facilitate access to credit, are expected to bolster business-sector capital formation and productivity. However, full implementation of reforms is essential, and a renewed push may be needed to fight informality and to boost anti-corruption efforts.” This is optimistic but requires the Mexican government to implement new policies and reforms in order to favor the growth of capitalism.
Standard and Poor’s expressed their concern about the future of the Mexican economy, when they lowered Mexico’s sovereign credit outlook to “negative from stable,” this past August. Knowing this, it is imperative for the Mexican government to execute the best economic reforms in order to stimulate and grow the economy, and the government must also meet their debt and interest payments on time, despite slow growth in GDP, in order to maintain a healthy credit rating.
Other Mexican ETF’s, and some Latin American ETF’s, worth exploring include:
- QMEX – SPDR MSCI Mexico Strategic Factors ETF
- DBMX – Deutsche X-trackers MSCI Mexico Hedged Equity ETF
- HEWW – iShares Currency Hedged MSCI Mexico ETF
- ILF – iShares S&P Latin America 40 Index ETF
- GML – SPDR S&P Emerging Latin America ETF