The iShares MSCI Mexico Capped ETF (EWW) is up nearly 4% in the past month, but the ETF and Mexican equities in general are struggling to keep pace with the returns offered by other Latin American equity markets.
Still saddled with a year-to-date loss, EWW has the dubious distinction of being the worst performer among the ETFs tracking Latin American emerging markets (Argentina is a frontier market). Only recently has EWW started participating in a rally that has seen the iShares MSCI Brazil Capped ETF (EWZ) and the Global X FTSE Colombia 20 ETF (GXG) gained an average of 21% over the past 90 days. Over the same period, EWW is up just 5%. [Worst ETFs of Q1]
Until recently, investors had been skirting EWZ in favor of EWW, saddling the largest Brazil ETF with outflows in favor of the Mexico ETF. That trend has reversed over the past month as EWZ has hauled in $296 million, more than 22 times the amount investors have allocated to EWW. [Brazil ETF Skirted in Favor of Mexico]
There issues to evaluate before jumping into EWW and Mexican stocks.
“In our country-ranking methodology we have seen the Mexican stock market move around our attractiveness list quite a bit. For several quarters, however, it has been lurking at the bottom of the pack as extremely high valuations (relative to its own history as well as to the other thirty countries in our model) have kept the market in an unattractive zone, which currently means the absolute bottom of our list,” said Accuvest Global Advisors in a recent note.
One reason EWW is expensive is its conservatively-position sector weight. Consumer staples and telecom names combine for 38.5% of the ETF’s weight, leading to a price-to-book of almost 4.3 compared to three for the iShares MSCI Emerging Markets ETF (EEM) .
Investors have stuck buy EWW in anticipation of widespread economic reforms, including those expected to open Mexico’s hard-to-access energy industry.
“In April, the government laid out new proposals implementing regulations to its congress that will dictate how it plans to open up its oil and gas resources for international private investment. There are more key dates in the timeline towards eventual implementation. The biggest is a special session of Congress planned for mid-June, at which time Congress will debate and vote on the regulations that have been put forth. A simple majority of 51% is required for passage. Regulations will lay out the specifics on bidding rounds, contracts, tax structures, etc. ,” said Accuvest.
Accuvest notes that if energy reform in Mexico materializes as hoped and has the anticipated effect of creating new jobs, Latin America’s second-largest economy could land a credit rating upgrade. Standard & Poor’s rates Mexico BBB+, better than the sovereign ratings of Brazil, India and Russia. However, EWW has no energy sector exposure. [Loving LatAm ETFs Again]
iShares MSCI Mexico Capped ETF
Tom Lydon’s clients own shares of EEM.