The iShares MSCI Mexico Investable Market (
EWW
) has been on a run over the last three months beating both the
SPDR S&P500 (
SPY
) and the iShares S&P Latin America 40 (
ILF
) since the beginning of the year.
[caption id="attachment_56003" align="alignright" width="220"
caption="Zocalo town square, Mexico City"]
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EWW has jumped 12.2% against gains of around 7.5% for the other
two funds. This is while the Mexican economy has benefited
from an increase in commodity prices and a rebound in the United
States, its largest trading partner.
But there is reason to believe that the relative outperformance
could moderate in the months to come or even underperform
other regional funds.
Industrial output
, released Wednesday, showed an increase of 5.9% over the last
year, but fell the most in three years on a month-over-month basis.
Output fell 1.7% from January's 1.29% increase. While some
reduction was expected, the sharp decrease caught many off
guard.
The fall in industrial production comes on the heels of a
disappointing jobs number in the U.S. last week and signs that the
rebound may be moderating in Mexico's northern neighbor. A string
of weaker-than-expected economic reports has led many to believe
that Mexico's central bank may step in with a rate cut to protect
growth. Inflationary
pressures
have come down marginally to 3.73% in March, giving the monetary
authorities some room for stimulus.
Investors may not want to jump into the market on the hopes of
central bank easing however, as persistently high and volatile
energy prices may drive pricing pressures higher over the year.
More importantly, the Mexican central bank is one of the most
conservative when it comes to policy changes. The bank has not
moved rates from 4.5%, a record low, since 2009.
On a relative valuation basis, the EWW trades at approximately
15 times the trailing earnings of companies held in the fund. This
is relatively expensive when compared to valuations of 12 and 13
times trailing earnings for the regional fund and the
S&P500.
Dividends may not compensate investors to stay in the shares
either. The country fund pays a yield of just 1.5%, well below the
2.9% yield for the Latin American regional fund and below the
S&P average of 1.9%.
The Mexican fund has handily beaten the regional fund over the
last year with a loss of only 5.3% versus a drop of 14.8%, largely
due to weakness in the Brazilian market. The S&P500 beat both
funds, managing to eke out a gain of 3.8% over the last 12 months.
With economic data showing a moderation in Mexico and a possible
rebound in Brazil, investors may want to shift exposure to the
regional fund or other countries within the Latin American
investable universe.
