Does a Slowing Economy Signal Trouble for Mexico ETFs?


Not only did the U.S. suffer a lackluster first quarter 2014, its neighboring country also encountered a similar fate. Mexico – Latin America’s second largest economy – grew at a less than expected rate during the first quarter of this year.

Weak domestic demand and sluggish economic activity seemed to be the primary reasons for a subdued 0.3% growth in the first quarter of 2014. Mexico’s GDP expanded by 1.8% year over year, below the estimate of 2% growth (read: Mexican ETFs in Focus for Cinco de Mayo).

Weaker exports to the U.S. (Mexico’s largest trading partner) because of the harsh winter and a higher tax rate have taken a toll on its economy. In fact, higher tax rates have dented consumer confidence and affected retail sales. Mexico’s retail sales slumped during the first two months of the year. Also, construction activity dropped 2.8% during the previous quarter, marking the sixth consecutive quarter of contraction.

Weak Forecasts

Soft data has indeed prompted the Mexican government to lower its GDP target to below 3% for 2014. The country’s Finance Minister now expects its economy to expand at 2.7%, down from its previous forecast of 3.9%. This is the second year running in which Neito’s administration has downgraded its growth outlook (read: Is the Mexico ETF a Better Play on Latin America?).

The country’s central bank too has cut its GDP growth forecast for this year. From a 3%-4% growth rate expected earlier, the Mexican central bank now expects its country’s GDP to grow at a lower rate of 2.3% to 3.3%. The downgrade is larger than what most economists had expected, according to a Walls Street Journal report.

Hopes of any Turnaround?

Though the first quarter GDP numbers signaled a gloomy picture for the Mexican economy, some of the analysts expect the economy to gain momentum in the upcoming months.

The Mexican government has recently come out with a new infrastructure program and has raised its infrastructure spending target to $587 billion by 2018. The increased level of government spending is expected to bolster the country’s growth in the long run.

Moreover, the Neito administration has made a very vital decision in terms of liberalizing its powerful energy sector. The country has recently outlined a number of market-friendly proposals to open the country’s oil and gas industry to competition.

The proposals, if approved by the Congress, will mark the opening up of Mexico’s energy sector to foreign firms for the first time since 1938. In fact, the Government of Singapore Investment Corporation (Singaporean government-owned investment vehicle) has already expressed its interest to explore investment opportunity in Mexico’s energy sector.

The gradual recovery in the U.S. economy also signals that the Mexican economy might follow the same course. An improving U.S. economy is expected to bolster Mexico’s export sector. Mexico has reported a trade surplus of $510 million in April, the third trade surplus in a row.

So, things are expected to improve in the upcoming quarters in spite of the uninspiring GDP numbers and downgrades faced in Q1. The country in support of this fact has divulged improving exports and retail numbers lately and has taken some great reform measures like the liberalizing of Mexico’s state oil monopoly.

Mexican ETFs

Thus Mexican ETFs might not be as badly hit by the recent downgrades given chances of brighter days ahead. Investors can keep their positions intact in the two Mexican ETFs, iShares MSCI Mexico Capped ETF (EWW) and db X-trackers MSCI Mexico Hedged Equity Fund (DBMX), as they might see some gains in the coming months, if things turn in their favor (see all the Latin American Equity ETFs here).

EWW in Focus

The fund is the most popular ETF in the Mexican ETF space with an average trading volume of $2.9 billion. The fund holds a basket of 51 stocks, with a huge 15% allocation to its top holding- America Movil Lord from the Telecom sector.

On the whole, companies from the Consumer Staples sector dominate the fund having 21.9% allocation, followed by Financials (20.31%) and Materials (16.7%).

Though the fund is still trading in the red in the year-to–date frame, it has shown some strength lately and has gained roughly 5% in the past one month.

EWW currently carries a Zacks Rank #3 or Hold rating.


Launched in January this year, the fund manages a small portfolio of $4.9 million and sees very light trading volume (read: 3 More Hedged ETFs Hit the Market from Deutsche Bank).

The fund seeks to track the MSCI Mexico IMI 25/50 US Dollar Hedged Index to provide exposure to Mexican equities. The fund looks to mitigate the risks arising from any fluctuation in the Mexican peso relative to the U.S. dollar.

Apart from the hedging factor, the individual holdings and sectoral allocation of DBMX are pretty much the same as EWW, which seems to be the primary reason for the fund’s unpopularity.

The fund has nonetheless gained 3.2% in the past one month.

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