Investors often think that investing in emerging markets means allocating capital to a country that is on another continent thousands of miles away. That is often the case, but the reality is what may be one of the top opportunities in the developing world is not too far away. The country in question is neighboring Mexico.
Stellar equity market performance from south of the border is not a new concept. Due in part to an often intimate correlation between U.S. and Mexican stocks, the iShares MSCI Mexico Capped ETF (EWW) has surged 32.5% over the past three years. Over the same time, the major Brazil, China and India ETFs are all in the red. [Some Emerging Markets Bright Spots]
While emerging markets investors have spent significant time focusing on the BRIC nations, Mexico, home to a larger economy than popular non-BRIC developing markets such as South Korea, Indonesia and Turkey, has shined. Mexico still has traits that could make EWW an attractive play for investors, including “a balanced government budget, a steadily growing population, a dramatically reduced deficit and relatively high interest rates,” reports Matt Twomey for CNBC.
There are risks. Last Friday, the Bank of Mexico surprisingly cut its key rate by 0.25% to 3.75% while stating that economic risks have escalated and the economic expansion could be revised lower from their prior 3.2% to 4.2% forecast. Inflation levels dropped to 3.47% in July, its slow pace since 2009. [Surprise Rate Cut Lifts Mexico ETF]
Additionally, Mexican stocks are expensive compared to broader emerging markets indices. Consumer staples and telecom names combine for almost 43% of the fund’s weight, explaining why EWW trades at a premium to the broader emerging markets universe. [Energy Reform May Benefit Mexico ETF]
Still, there are reasons to believe EWW has more long-term upside than downside. Mexico is looking to liberalize its energy sector in an effort to boost output and foreign direct investment in the country. As labor markets in China and elsewhere mature and wages rise, Mexican labor becomes more competitive even if still more expensive, reports CNBC. Then there is the obvious catalyst of proximity to the U.S., the world’s largest economy. No emerging market can come close to rivaling Mexico on that front and that advantage is not going anywhere.
Although Mexican stocks look expensive compared to China or Russia, that premium may be justified because in the current environment, investors want some element of dependability in their emerging markets investments. EWW may just offer that.
iShares MSCI Mexico Capped ETF
ETF Trends editorial team contributed to this post.
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.