As the latest polls tracking the upcoming US Presidential election have shown Democrat candidate Hillary Clinton and Republican nominee Donald Trump are engaged in a neck-and-neck fight, Mexican financial assets have become more volatile.
We believe this volatility may heighten as the election is just around the corner. Historically, this is the first time that the Mexican financial sector and its overall economy are so closely related to the outcome of the U.S. presidential election.
Mexico came to the limelight of this year’s Presidential election once republican contender Trump made the country a prime target. Trump has accused Mexico of taking away jobs from Americans. He questioned the viability of the landmark 1990s trade agreement between the US, Mexico and Canada. He said that he will renegotiate the North American Free Trade Agreement, commonly known as NAFTA, or pull out of it, and build a wall along the US-Mexico border to curb illegal immigration.
This would hamper the trade relationship between Mexico and the US, and hurt Mexico’s exports.
Notably, 81% of its exports go to the US that makes up for more than one-third of Mexico’s GDP. The renegotiation might impose a 35% tariff on the import of Mexican goods, like cars, to the US. Trump’s policies could prove a nightmare for the Mexican economy with less employment, less income, lower exports, and thus a weakening currency. (read: Behind the Post Presidential Debate Surge in Mexico ETF).
Earlier this year, Mexico’s central bank surprisingly raised interest rates in a bid to halt the peso’s slide, a decline that was worsened by the Brexit referendum. However, Mexico adopted this stance when other emerging market economies were doing just the opposite. Mexico’s central bank said the first rate hike earlier this year was not the start of a new tightening cycle. Despite this, recently it boosted borrowing costs by 50 basis points to 4.75%, the country’s highest interest rate since 2009.
The Mexican central bank has warned that the upcoming US Presidential election is the biggest threat to Mexico’s economy. Though Clinton has mostly maintained a strong lead throughout the campaign period, Trump recently raced closer. Against such a scenario, Mexico’s central bank’s warning makes sense. (read: ETFs to Watch as Trump Races Closer to Clinton). With Mexico’s economy showing signs of a slowdown, Donald Trump is, in the eyes of some market observers, a potential negative for the Mexican peso.
Is There a Ray of Hope?
Despite the volatile economic scenario, several economists and industry researchers have spotted a silver lining. Mexico’s economy has rebounded strongly from its first period (in the second quarter of 2016) of contraction in three years, registering better than expected growth of 1% in the third quarter of 2016. It was the best three months of growth since the second quarter of 2014. Quarterly GDP was 1.9% higher than the same period in 2015, according to Mexico’s statistics office Inegi.
Additionally, Mexican financial markets were supported by the expectation that the Organization of Petroleum Exporting Countries and other large crude oil producers would limit production. Mexican assets have been suffering for quite some time due to the plunge in crude oil prices. This raised concerns about the government finances and triggered negative outlook on the country’s credit rating.
With no elections in sight until 2018, and a stronger economy than most of the emerging markets, Mexico seems a decent investment destination compared to other countries with higher risk profiles.
Below we’ve highlighted three Mexico-focused ETFs which should be closely monitored as the U.S. presidential election approaches…
iShares MSCI Mexico Capped ETF (EWW): This ETF seeks investment results that correspond generally to the price and yield performance of MSCI Mexico IMI 25/50 Index. The fund manages an asset size of nearly $1,222.2 million and an average daily trading volume of 3,119,512 shares. The fund charges an expense ratio of 49 basis points a year.
EWW is up 3.21% so far this year (as of October 31).
Deutsche X-trackers MSCI Mexico Hedged Equity ETF (DBMX): This fund seeks investment results that correspond generally to the performance, before fees and expenses, of the MSCI Mexico IMI 25/50 US Dollar Hedged Index. The fund manages assets worth $4.4 million and an average daily trading volume of 1,867 shares. The fund charges an expense ratio of 50 basis points a year.
DBMS has rallied 10.53% so far in 2016 (as of October 31).
iShares Currency Hedged MSCI Mexico ETF (HEWW): This ETF seeks to track the investment results of an index composed of large-, mid- and small-cap Mexican equities while mitigating exposure to fluctuations between the value of the Mexican peso and the U.S. dollar. The fund manages an asset size valued nearly $1.2 million and an average daily trading volume of 354 shares. The fund charges an expense ratio of 52 basis points a year.
The fund is up 8.45% so far this year (as of October 31).
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