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Topic: ETFs

New trade agreement spurs Mexico’s outlook


iShares MSCI Mexico ETF LISTEN:  

The successful conclusion of NAFTA renegotiations—and the creation of the new United States-Mexico-Canada Agreement, or USMCA—should boost Mexico’s economic prospects. Combined with lower inflation and a boost to exports from a lower peso, the economy and stock market could be headed for better times.

Here is an ETF that provides exposure to the top Mexican publicly listed companies.

ISHARES MSCI MEXICO ETF $48.89 (Nasdaq symbol EWW; TSI Network ETF Rating: Aggressive; Market cap: $1.1 billion) tracks the performance of the largest publicly listed Mexican companies.

Financial Services account for 17% of its assets, while Telecommunication services (15%), Basic materials (15%), Consumer cyclical (14%), Industrials (11%) and Consumer defensive (10%) are other key segments.

The ETF holds a portfolio of 57 stocks; the top 10 holdings make up a high 62% of its assets. They include America Movil (telecommunications, 14.4%), Formento Economico Mexicano (beverage and retail, 9.6%), Grupo Financiero Banorte (financial services, 9.4%) and Wal-Mart de Mexico (retail, 8.0%).

The ETF started up in March 2006 and charges an MER of 0.49%. With an average of $189 million in units trading daily, the fund provides good liquidity.

It has a p/e of 15.6 based on the forward earnings of the stocks it holds. The fund pays a fluctuating dividend twice a year. Over the past 12 months, the dividend amounted to $1.08 a unit, for a yield of 2.2%.

Mexico was conquered and colonized by Spain in the early 16th century. Administered as the Viceroyalty of New Spain for three centuries, it achieved independence early in the 19th century.

Elections held in 2000 marked the first time since the 1910 Mexican Revolution that an opposition candidate—Vicente Fox of the National Action Party (PAN), defeated the party then in government, the Institutional Revolutionary Party (PRI). Fox was succeeded in 2006 by another PAN candidate, Felipe Calderon. However, Enrique Pena Nieto regained the presidency for the PRI in 2012 and will serve as president until December 1, 2018. A left-leaning populist, Andres Manuel Lopez Obrador, from the Morena party, was elected president in July 2018 and will begin his six -year term in December.

Mexico’s current government, led by President Pena Nieto, has tried to emphasize economic reforms by implementing sweeping energy, financial, fiscal, and telecommunications reform. The aim was to improve the country’s competitiveness and economic growth.

Since 2015, Mexico has held public auctions of oil and gas exploration and development rights. It has also auctioned long-term electric power generation contracts. IN additon, it has also issued permits for the private sector importation, distribution, and retail sales of refined petroleum products This is an effort to attract investment in the energy sector, and so boost falling production.

Mexico has transformed itself into one of the economic and political powers of Latin America. The $2.4 trillion economy—11th largest in the world—has increasingly moved toward manufacturing since the North American Free Trade Agreement (NAFTA) came into force in 1994. Still, per-capita income is roughly one-third that of the U.S. and income distribution remains highly unequal. The country’s major problems—crime, corruption, lack of opportunity (which drive many Mexicans to the U.S.)—have worsened in the last two decades since Mexico underwent democratic reforms.

The economy is still largely driven by services (62%) followed by industrial activities, including manufacturing (24%) and agriculture (13%). Government consumption is equal to 13% of the economy. Exports comprise 37%.

Economic growth averaged 2% over the past 5 years. Uncertainties related to NAFTA and the presidential elections depressed investment, while higher interest rates and fiscal austerity also weighed on domestic demand in recent years. However, with the revised NAFTA negotiations now completed (see box) and interest rates continuing to rise, growth is forecast to rise from an estimated 2.3% for 2018 to 2.7% for 2019.

The Mexican Peso has been volatile over the past 10 years. It has also been weak against the U.S. dollar since July 2014. Still, a weak Peso, plus the strong recovery in the U.S. economy over the past five years, has helped to spur Mexican exports.

However, the weak currency makes imports more expensive. The removal of government controls on gasoline prices and an increase in the excise tax on fuel also helped to raise the annual inflation rate to 6.8% for 2017. That was the highest level in 16 years. This prompted the Mexican central bank to raise interest rates from 3.0% in 2015 to 7.5% by end of August 2018. Inflation has now eased to 4.9%, and is expected to moderate through the rest of 2018. That should let the economy move toward the central bank’s inflation target of 3% target for 2019.

Government finances are in reasonable shape with a 2017 budget deficit of 1.9% of GDP, That’s below the upper limit of a 2.5% target. Government public debt to GDP is reasonable at 54%; the country has sound investment-grade credit ratings, with BBB+ grades from both S&P and Fitch for its long-term foreign and domestic debt issues.

Mexico has a large labour force of 55 million people with a low unemployment rate of 3.6%. Still, the country’s underemployment rate (workers not fully employed) is estimated at around 25%.

Over the past year, the iShares MSCI Mexico ETF lost 5.0%. That’s well behind the 6.5% gain for the broad-based MSCI World Equity Index. Over the past five years, the ETF lost 16.9%—lagging the 53.9% gain for that world equity index. However, the past five years was an especially difficult time for most emerging markets, and this Mexico fund has performed slightly better than the average emerging market ETF.

For aggressive investors who want exposure to Mexico, the iShares MSCI Mexico ETF is a sound choice.

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