Is there less to Mexico than meets the eye?


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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"] Image courtesy SElefant: [/caption]

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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Stocks

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