The
Mexican economy fell in May
for the first time since April as manufacturing and services both
showed weakness, offset by gains in agriculture. The monthly gauge
of economic activity fell 0.36%, showing yearly growth of 4.1%
against gains of 4.78% in the twelve months to April.
[caption id="attachment_57076" align="alignright" width="300"
caption="The historic center of Mexico City"]
[/caption]
The iShares MSCI Mexico Investable Market (
EWW
,
quote
) fell almost 0.5% on the report but is still up 12.5% year to
date, beating the iShares S&P Latin America 40 (
ILF
,
quote
) by almost 18% since January.
Expectations are for more pain to come as slower
U.S. growth crimps export demand and high unemployment, at
4.8%, starts to slow domestic demand. Aside from fundamental
weakness, markets could see profit-taking as sentiment comes off
highs from talk of market liberalization and reforms leading up to
the presidential election.
Stimulus measures in other countries may support growth in the
Mexican economy as higher oil prices increase revenues at
state-owned Pemex. Investors should be cautious when pricing in
gains from stimulus or easing from Mexico's central bank. One of
the world's most conservative monetary authorities, it is not
likely to move rates from the current 4.5%. Inflation in June
surprised on the upside at 4.34%, the highest since 2010 and above
the central bank's range of 2% to 4%.
Long-term strength in the Mexican economy remains intact as
eventual market liberalization should boost investment and
production in the country's oil assets. Further aiding the
long-term picture is one of the highest rates in workforce growth
in Latin America. The International Labor Organization estimates
the workforce will grow by 20% in the decade to 2020, well above
growth of about 14% in Brazil and Argentina. This constant influx
of labor will help keep employer costs down, but will tax the
government's ability to reduce unemployment.
Despite the impressive performance of the Mexican economy,
investors may want to take profits or hedge their bets through the
rest of the year. The country's index has underperformed the Latin
American benchmark by about 1% over the last week, and a
combination of valuation and weaker than expected economic data may
extend losses.
You should retain some exposure to the Mexican economy on
strength in the long-term outlook, but may want to hedge or
decrease exposure for the rest of this year. The Global X FTSE
Andean 40 (
AND
,
quote
) remains a favorite for its diversified exposure across three
strong performers in the region. Brazil remains at
underweight due to political risk
and
Argentina remains at avoid
for any but the most speculative bets.
