Mexico, the second largest economy of Latin America has turned into something of a manufacturing powerhouse. In fact, it has stolen share of production from other big emerging nations such as China.
Attributable to its fundamentals, the Mexican economy has beaten even Brazil in terms of the biggest economies of Latin America. Its competitive manufacturing costs, open economy, and low debt level in both the private and public sectors had helped it to rapidly increase its growth level (Forget Brazil; Mexico ETF is Hot).
However, lately this fast growing economy of Latin America seems to have gone into a reversal. The Mexican economy contracted in the second quarter for the first time in four years.
The economy reported a contraction of 0.7% in its growth level compared to its first quarter growth. Earlier the central bank had cut its growth projection for the economy to 2% in 2013 which is not even the half the pace of growth in 2012.
It also appears that lower public spending along with the region’s stagnant export level to U.S. has impacted the growth prospects of the economy. It should be noted that United States’ economic prospects are closely tied with the Mexico’s economic development. Mexico exports as much as 80% of its goods to U.S. while imports from U.S. account for almost 50%.
However, an industrial recovery is expected to further gain strength in U.S. which should improve the export level of the Mexican economy. Moreover, a strong manufacturing sector along with favorable demographics should also fuel the growth of the economy going forward (see all the Latin America Equity ETFs here).
Rate Cut by the Bank
Conversely, what came as a surprise is the central bank’s initiative to cut interest rates thereby bringing interest rates to their lowest level. This is the second time that Mexico had cut its interest this year.
Mexico’s central bank had cut its rates by a quarter-percentage-point to 3.75%. The move is expected to strengthen the economy of Mexico and monetary easing policy by the bank.
Impact on Mexico ETF
The ETF tracking the Mexican economy, iShares MSCI Mexico Capped Investable Market Index Fund (EWW) traded higher by nearly 3% after Banco de Mexico unexpectedly decreased the interest rate.
EWW tracks the MSCI Mexico Investable Market index which consists of stocks traded primarily on the Mexican Stock Exchange. The index is a capitalization weighted index that aims to capture 99% of the total market capitalization (read Why the Mexico ETF is a Long Term Winner).
Mexico ETF in Focus
Launched in March 1996, the fund now has more than $2.4 billion in AUM and appears to be one of the popular Latin America choices among investors as indicated by its trading volume of more than 5 million shares a day.
The assets are invested in 48 holdings with an average market cap of $30.33 billion. Among individual holdings, America Movil appears to be dominating the performance of the ETF as indicated by its allocation level of 16.07% in the ETF. Among others, the fund does not invest more than 7.77%.
However, the fund appears to have a concentrated holding pattern in its top ten choices of companies. Investment in top ten holdings stands at 58.7%.
Among sector allocation, the fund appears has done a good job in spreading the asset base. Consumer staples (22.8%), financials (19.6%) and telecom (16.6%) are the top sectors that the fund is invested in. Materials and Industrials also get double digit allocation in the fund.
The fund charges 53 basis points per year in expenses and currently has a 30-say SEC yield of 0.82%.
The fund delivered a gain of 7.37% over the period of one year while its year-to-date loss stands at 6.02% (also read Avoid These 3 Emerging Market ETFs).
This ETF could be a solid choice for investors looking for a further turnaround in emerging markets. The country is closely-tied to the U.S., and with our economy coming back strong, things could be looking up for Mexico too.
Given this information and the boost of the recent rate cut, Mexico could now be back on track and once again worth a closer look by investors seeking exposure to this emerging economy.
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- Latin America