The Mexican stock market kicked off 2019 on the right foot. And despite a strong U.S. Dollar, the Mexican Peso has also held its ground. The result is that the iShares MSCI Mexico Capped ETF (NYSEARCA:EWW) is up 7% year-to-date, and it has rallied more than 17% from its late 2018 low.
That’s not all: There’s likely more good news to come for Mexican stocks.
That, in turn, will lift EWW stock as 2019 continues. Despite political rumors that drove Mexican shares down sharply last year, its government and the Trump administration continue fostering closer relations.
Meanwhile, the Federal Reserve’s easier monetary policy is likely to help boost all-important industrial production in Mexico. With all of that in mind, let’s take a closer look at how Mexico is faring so far this year.
Mexico and the U.S. Build Closer Ties
Let’s head back in time to November 2016, when Mexican stocks were in freefall. The Peso lost more than 10% of its value in the moments following Trump’s upset victory on election night. Within a few weeks, Mexican stocks plummeted more than 20%. With Trump’s incendiary rhetoric on the campaign trail, many feared that U.S.-Mexican relations were heading for a nasty turn. Living in Mexico at the time, I suspected otherwise.
Mexico and the U.S. are too close culturally for relations to break down.
There are an estimated 1 million North American expats in Mexico. To the north, there are tens of millions of Mexicans and Mexican-Americans in the United States. Additionally, 80% of Mexico’s manufacturing output goes to the U.S., and on the other end, Mexico is the U.S.’ second largest trading partner after China. A U.S. analysis firm suggested that America would lose several million jobs if Trump followed through on rhetoric to scrap NAFTA.
As game theory would suggest, cooler heads prevailed. Mexican stocks soared in 2017, with many running 30-50% off the election lows within six months. Amazingly enough, this whole process started to repeat in 2018. This occurred when Mexico elected a socialist-leaning president, Andrés Manuel López Obrador “AMLO”. AMLO’s victory ended several decades of centrist or right-wing rule in Mexico. Again, foreign analysts predicted that Mexico was about to go to pot. Hence the great buying opportunity in late 2018 as foreign money fled the country.
Since taking office, however, AMLO has doubled-down on closer relations with the U.S. Last week, the Mexican president announced that the U.S. and Mexico are close to terms on a new $10 billion investment package that will spur investment in Mexico and Central America while stopping migrant caravans to the U.S. Furthermore, he suggested that the U.S. is open to giving Mexico more favorable treatment on contentious steel tariffs.
AMLO campaigned on a populist platform centered around limiting corruption. Mexico has a well-earned reputation for being a corrupt country, and this unfortunate reality has greatly limited economic growth. Of course, all Mexican politicians pay lip service to the idea of fighting this vice.
But AMLO is actually taking decisive action. In January, for example, he cracked down on narco groups that tap the country’s gasoline pipelines robbing fuel for profit. This move caused a two-week nationwide gas shortage. Analysts expected AMLO to meekly back down, giving the narcos another victory. Instead, he held his resolve, with the Mexican people polling at 70% in favor of his actions, and his first big move against illicit activity was an unquestioned success.
AMLO also raised concerns by canceling plans for Mexico City’s long-awaited new international airport. This caused another selloff in Mexican stocks and its currency, particularly since the government had already issued debt to pay for the airport. But AMLO said the airport contract involved corruption, and was a plot to enrich the elites. He is instead working on an alternate plan to increase capacity at outlying airports around Mexico City. Over time, foreign analysts are now seeing that AMLO is a man who sticks to his word, rather than an unhinged radical as he was widely perceived last year.
Mexico’s Economy: Doing Fairly Well
Mexico’s economy dipped slightly as AMLO took office. It contracted 0.4% in November and December as some businesses and consumers pulled back, waiting to see what the new government would look like. However, consumer confidence is rebounding, and economic activity is picking up again. On Monday, January GDP figures came out, and the economy grew 0.2%, blowing away expectations for another month of contraction. While there’s still risk around the new government, AMLO is not trying to position himself as pro-business in general, on-the-ground economic activity is picking back up again.
For the year, GDP growth estimates now range between 1.1% on the low end and 2% on the high end from official Mexican sources. This is hardly booming economic growth for an emerging market, but it’s fairly good nonetheless, given all the headwinds that emerging markets currently face. Additionally, Mexico’s inflation rate has dipped back to 3.9% after topping 7% in the wake of Trump’s victory. On top of that, unemployment is low.
When you look around Latin America, Mexico is looking like one of the best options. You see horrific economic performance in some countries — Argentina shrunk by almost 3% in 2018 for example. Others, like Brazil, are barely above the flatline, while Chile has been in a near no-growth state for many years now.
EWW Stock: Well-Positioned As the United States’ Key Partner
Mexico is on structurally better footing as its economy is overwhelmingly driven by selling things to the United States. Now that there is a new NAFTA agreement and AMLO and Trump have a buddy-buddy relationship, things look quite solid for EWW over the next year. Mexico is not vulnerable to commodity price shocks like most emerging markets. And its reliance on the United States keeps it relatively safe from further economic weakness in either China or Europe.
Finally, now that the Fed has abandoned its hard money policy and said there will be no more rate hikes, expect industrial activity to pick up again. Companies were putting off expansion knowing that higher interest rates would slow down demand. With the Fed now easing off the brake, the American economy should be set for a better 2019 than people were expecting just three months ago. And for the U.S. to grow, it needs to order more basic manufactured goods from its leading supplier, Mexico.
With Mexico’s economy already picking back up and the government performing well-ahead of expectations, the Fed’s latest moves should be the final catalyst needed to get EWW stock really moving as 2019 progresses. EWW stock, currently at $44, could trade back to its 52-week-high of $54.
Look for political concerns to ease and manufacturing activity to accelerate. The pieces are in place for Mexico to continue having a fine year.
At the time of this writing, Ian Bezek owned various individual Mexican equities, though he had no position in the EWW ETF. You can reach him on Twitter at @irbezek.