Mexico hasn’t had a fantastic year so far, but the country is ready to close out 2019 on a high note. Over the past month, the iShares MSCI Mexico Capped ETF (NYSEARCA:EWW) has been the top performing country ETF in the world, up 10% for the past 30 days. That beats out the iShares MSCI South Korea Capped ETF (NYSEARCA:EWY) at 9.3% and the iShares MSCI South Africa ETF (NYSEARCA:EZA) at 6.3% for the honors.
Year-to-date, however, the Mexico ETF is up a more modest 4.2%. It was in negative territory, in fact, until the big September run got going. So what’s behind Mexico’s performance so far, and will the recent surge continue into the fourth quarter?
Argentine Troubles Rattle Regional Markets
Mexico and Argentina have more differences than similarities as far as culture, business environment and politics go. Yet, many investors lump everything “south of the border” together. Thus, when one country has a crisis, other Latin American countries feel a shock as well.
This is particularly true of Mexico, since it has the region’s only fully deliverable free-floating currency. The Mexican Central Bank takes a hands-off approach to its peso, and rarely intervenes in the currency market. Thus, whenever institutions in New York or London want to bet against Latin currencies, they tend to hedge by betting against the Mexican peso and its related stocks. Mexico is the region’s most broad and liquid market.
This dynamic played out in August, when Argentina shocked the world. In its preliminary elections, Argentina’s voters backed the socialist candidate for president against expectations that the current pro-business president would win re-election. This led the Argentine stock market to lose nearly half its value in coming days, and the Argentine peso crashed 30%. It’s nearly impossible for most investors to bet against the Argentine peso directly, so many folks hedged by selling Mexico. Mexican shares fell sharply in August despite no particular news of note from that country.
Mexico’s Economic Performance: Good Enough
Argentina’s political meltdown scared investors in EWW, at least briefly. After all, Mexico elected a left-wing government of their own in 2018. Could Mexico follow Argentina and Venezuela down a dark spiral? The quick answer is “no.” Mexico’s populist president has certainly made some unfriendly moves for foreign investors, such as cancelling the already partially built new international airport in Mexico City.
On the balance, however, Mexico’s president is operating within the existing legal and political system rather than making extreme moves. For example, Mexico is working to shore up state oil company Pemex’s balance sheet, rather than threatening to default and nationalize assets, as you might see elsewhere in Latin America.
As far as the economy goes, Mexican GDP growth continues, albeit at a slow rate with 2019 set to come in around 0.5%. That’s not great. However, the central bank finished a huge interest rate increase cycle and can now cut aggressively in coming months. That will help bolster retail demand and lift consumer confidence. Additionally, the government is running a budget surplus, giving it wide latitude to raise spending to stimulate the economy if necessary.
How Oil Will Impact EWW Going Forward
Part of the September run-up in EWW is related to the recent attacks in Saudi Arabia. Investors view Mexico as a big oil producer, and thus assume the supply jitters in the Middle East will be a positive for Mexico’s economy. And they’re probably right. But perhaps not in the way they expect.
First things first, Mexico still does produce a good deal of oil. However, internal demand has risen greatly in recent years, while output has declined. As a result, Mexico does not export that much oil anymore. The country is far more reliant on manufacturing exports to the U.S. to bring in cash than it is on oil. So don’t think it’s as simple as the price of oil going up meaning EWW and Mexican stocks will skyrocket.
That said, Mexico does win in another way. If Middle Eastern oil supplies become higher risk, you’ll see more production in North America. A good deal of that will happen in the Permian region of Texas, right on Mexico’s border. As it is, Mexico buys a lot of refined petroleum products such as asphalt from U.S. plants. More production in Texas should keep prices nice and low for these goods, helping Mexico’s overall economic performance.
Additionally, that Permian oil comes with a huge side of associated natural gas. Mexico is a big beneficiary of this. The country is increasingly using cheap natural gas for both electricity and feedstock for manufacturing goods such as chemicals. Again, the more Texas produces, the more Mexico will win, particularly as additional pipelines come into service. Regardless of all noise from President Donald Trump, Mexico and the U.S. have a new trade agreement in place, and economic relations between the two countries continue to deepen. That’s bullish for EWW in coming months and years. As the trade war weakens other American relationships, the partnership with Mexico becomes more important.
Bottom Line on EWW ETF
While EWW, the Mexican fund, was my pick for the best ETFs of the year, there are plenty of individual companies to look at as well.
The Mexican airport operators, for example, are booming. Grupo Aeroportuario del Centro Norte (NASDAQ:OMAB) is showing tremendous traffic growth. It manages airports in Mexico’s industrial north which is surging thanks to the new trade deal. Meanwhile Grupo Aeroportuario del Pacifico (NYSE:PAC) is surging as well. It owns both touristy airports such as Puerto Vallarta and Mexico’s airport in Guadalajara, which is the country’s second-biggest city. OMAB stock and PAC stock have surged 17% and 14% this year, easily topping the EWW index.
Two more conservative Mexican stocks of interest come from the Femsa family. Fomento Economico Mexicano (NYSE:FMX) operates more than 15,000 convenience stores. It also runs pharmacies, gas stations and other retailers. This makes it a great play on the emerging middle class in Mexico. Femsa also owns half of Coca-Cola Femsa (NYSE:KOF) which is the largest Coca-Cola (NYSE:KO) bottler in Latin America. KOF stock is down nearly two-thirds from its highs earlier this decade. However, the core business remains strong and shares should rally once political concerns in Latin America diminish.
Whether you own individual Mexican stocks or the EWW ETF, the future is bright. Mexican shares have rallied sharply in September. But they are still down from their peaks earlier this decade. That leaves lots of upside ahead. Mexico’s new government is populist, yes, but it hasn’t been a big threat to investors.
Meanwhile the economy is reasonably healthy, and there’s plenty of room for stimulus going forward. Closer ties with the U.S. will boost employment and provide cheap energy in coming years. For patient investors, there’s a lot to like about EWW and Mexican assets here.
At the time of this writing, Ian Bezek owned FMX, KOF, PAC and OMAB stocks. You can reach him on Twitter at @irbezek.