Peso Problems Could Plague the Mexico ETF
The iShares MSCI Mexico Capped ETF (EWW) is up just 1.3% year-to-date, a lackluster performance relative to other Latin America exchange traded funds. Now, investors might need to fret about more peso weakness.
Last week, it was widely reported that professional traders are heavily short the Mexican currency and that is factoring in last week’s surprising interest rate hike by Mexico’s central bank. Still, Mexico’s interest rate are low, leaving the central bank there little wiggle room to reverse course and lower rates if Latin America’s second-largest economy flails.
Related: How Central Banks Affect LatAm ETFs
However, some market observers are enthusiastic about Mexico’s long-term prospects as the country aims to be home to one of the world’s 10 largest economies.
As an oil exporter, Mexico’s currency was previously dragged lower hit by the falling crude oil prices – ETF investors should keep in mind that while Mexico has a large oil industry, none of the country-specific ETFs include exposure to the sector. Rather, EWW is heavily allocated to defensive sectors, such as consumer staples and telecom.
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Mexico’s peso is expected to further weaken this year and “that is even before factoring in the possibility that Donald Trump wins the U.S. presidential election, according to Barclays Plc analyst Andres Jaime, the most accurate forecaster of the dollar-peso exchange rate over the past six months among 27 economists surveyed by Bloomberg,” reports Isabella Cota for Bloomberg.
EWW is struggling while some other single-country Latin America ETFs are roaring higher. For example, the iShares MSCI All Peru Capped ETF (EPU) is this year’s best-performing single-country ETF while the Global X MSCI Argentina ETF (ARGT) tracks stocks in one of the world’s best-performing equity markets. The iShares MSCI Chile Capped ETF (ECH) has also been an impressive performer.
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“Jaime, 31, is the fourth-most bearish forecaster in the survey. He expects the peso to slide to 19.7 per dollar by the end of the year. The depreciation, he says, will be likely due to a slowdown in the Chinese economy and the rise in anti-free trade sentiment on both sides of the Atlantic as Trump vows to renegotiate deals and after the U.K.’s vote to leave the EU,” according to Bloomberg.
For more information on the Mexico ETF market, visit our Mexico category.
iShares MSCI Mexico Capped ETF
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.
