It’s been an eventful year for investors in Mexican stocks. Seemingly every month or two, some big development in U.S.-Mexican relations has shaken the market. But for owners of the iShares MSCI Mexico ETF (NYSEARCA:EWW), or individual Mexican stocks, all’s well that ends well. The EWW ETF still looks like a really good deal.
Following the recent resolution of Trump’s tariff threats, Mexican stocks and its currency stabilized. The Mexican ETF sports a 17% gain from its late 2018 low, and is up 8% year-to-date.
Many individual Mexican shares are up a lot more. My personal top holding in the country, airport operator Grupo Aeroportuario del Pacífico (NYSE:PAC) is up 48% over the past six months.
Tariffs: All Bark, No Bite
Last September, the governments of Canada, the United States, and Mexico came together and drafted the new US-Mexico-Canada trade Agreement “USMCA.” The countries’ leaders signed it in November 2018. It is intended to replace the previous NAFTA pact and makes modest changes to various provisions such as minimum wages for manufacturing workers and the regulation of auto industry jobs.
That was far from the end of the story, however. Last year, Mexico elected its first left-wing president in many years. He was inaugurated in December. Mexican stocks plunged as he started announcing policy. Investors feared that U.S.-Mexican relations would break down. This, along with the general slump in stocks last fall, set up the excellent buying opportunity for EWW late last year.
The Mexican Peso and related stocks surged to start 2019 as people figured out that the new president was no revolutionary a la Venezuela or Cuba. Additionally, the rising tensions between the U.S. and China looked great for Mexico. Presumably, as companies became fearful of investing in China, they would station more facilities in Canada and Mexico, as they already had a new trade deal in place.
Last month, however, Trump rocked the boat again. He went on Twitter to declare that the U.S. would be launching fresh new tariffs against Mexico unless they did more to control the flow of migrants. Mexican stocks predictably slumped again. Fortunately, Mexico and the U.S. reached a deal in time, and the scheduled tariffs never went into effect.
Smooth Sailing Ahead for EWW
Mexico’s president, despite being a leftist, appears to have a friendly relationship with President Trump. The two have spoken in favorable terms about each other on many occasions. With the tariff issue out of the way, the skies are looking brighter for Mexico-U.S. relations, and thus EWW, for the second half of 2019.
However, there’s still the possibility of another bump in the road. The latest issue is the ratification of the USMCA pact. Mexico has already made the new USMCA deal law. But Canada and the United States need their legislatures to approve the deal before everything is finalized. Canada is expected to ratify the deal this summer.
Meanwhile, Canadian prime minister Justin Trudeau was recently in the United States and met with Democratic leader Nancy Pelosi to urge her to support the deal. With Republicans largely in favor of USMCA, it would be the Democratic house that could shoot down the trade package if it wanted to.
The Democrats in Congress are said to especially concerned about protections for labor and the environment in the new trade package. However, most analysts still seeing Congress supporting the deal.
Mexico’s Economy: Still Trucking Along
The various political developments have far overshadowed Mexico’s actual economic performance. It’s not hard to understand why. But investors in EWW and other Mexican assets should be reassured to know that the economy is performing reasonably well. Despite the change in government, which led to a great deal of concern last year, economic numbers have been acceptable.
The inflation rate, for one, remains subdued at 4.2%. For an emerging market like Mexico, that’s a solid showing. Meanwhile, the unemployment rate there, like in the U.S., sits near multi-decade lows.
With the inflation rate back down and the Peso stable, the central bank can now focus on growth. The weakest part of Mexico’s economic outlook was GDP growth. It is running just 1.2% annually at the moment, as it took a hit with the political worries last year. But the Mexican Central Bank is now likely to start slashing interest rates in line with other central banks around the world.
After Trump’s election, the Peso slumped, and the Mexican Central Bank jacked up rates more than 300 basis points to fight inflation. That left the interest rate at a shockingly high 8.25 percent. This gives the bank tons of room to cut rates over and over in the coming months until economic growth gets back to more desirable levels.
Mexico Investing Outlook and EWW
In many ways, Mexico remains stuck under the cloud of the trade war. Despite having a new trade deal and close ties with the U.S., the EWW ETF hasn’t yet taken off. While the Mexican Peso is one of the strongest emerging market currencies this year, to date, when investors avoid the whole sector, it is hard for any individual country to shine.
Investors believe that emerging markets will struggle until China’s economy picks up again. That’s largely true. Rivals like Brazil rely heavily on exports to China to fund their own budgets.
But Mexico is in a different class, as it has far closer ties to the U.S. than any other emerging economy. Over time, Mexico will win a greater share of business as firms feel more reluctant to invest in China.
Mexico also has a robust manufacturing economy, which makes it more stable than emerging markets which rely on the sale of oil and natural resources. In any case, expect solid, if volatile, performance for Mexican stocks for the rest of 2019. Its own improving economic outlook should outweigh the issues with China and the global economy. But there could be a few bumps along the way.
At the time of this writing, Ian Bezek owned PAC stock and various other individual Mexican equities. He had no position in EWW . You can reach him on Twitter at @irbezek.