After sluggish growth over the last several months, Mexico picking up steam on positive sentiments building up on a slew of encouraging economic indicators.
This is especially true as Mexican industrial production expanded 3% year over year in December, up from 1.8% annual growth in November and above the market expectation of 2.7%. Both construction and manufacturing activities improved substantially buoyed by strong U.S. demand for Mexican exports. The job market is also showing signs of improvement as unemployment dropped to 3.8% in December from 4.3% a year-ago month. This trend is likely to continue in the coming months.
With this, Latin America's second-largest economy is expected to have grown above 2% in 2014, up from 1.4% in 2013. It will likely pick up to 3.5% this year, according to economists polled by the Bank of Mexico.
The HSBC Mexico Manufacturing Purchasing Managers' Index rose to 56.6 in January from 55.3 in December, representing the best performance in more than two years. Further, annual inflation eased sharply to 3.08% in the first half of January, well below 4.08% in December and the Reuters' expectation of 3.45%, according to the latest data from Mexico's national statistics. This suggests that inflation could reach the central bank's 3% target by midyear.
However, a slump in Mexican currency could act as a major headwind and might raise inflationary pressures in the coming months. Notably, the peso has fallen to a five-year low and has lost more than 12% against the U.S. dollar since the start of September. The drop in global oil prices coupled with international market volatility and the prospect of a U.S. interest rate hike later in the year pose major risks to the currency and economic growth (read: Can Energy ETFs Regain Fervor on Capital Spending Cuts? ).
In order to cope with declining oil prices, the Mexican government reduced the spending budget by $8.3 billion for this year. Most of the 2015 cuts will be seen in the energy sector and state-owned oil company, Pemex, which generates one-third of the revenues for the country. The central bank also plans to review spending in 2016 and beyond. The move will aid in narrowing deficits without increasing taxes and lower public debt-to-GDP in the coming years. Investors should note that public debt rose to 41% of GDP in 2014, up from 39% in 2013.
Apart from these, being an export-oriented economy, Mexico is a huge beneficiary of the strong U.S. economic recovery, probably stronger than many other countries in the world. This is because the United States is Mexico's largest trading partner with the latter exporting more than 75% of commodities to the former. Moreover, a slumping peso is actually benefitting exporters and the manufacturing industry by making goods more competitive, resulting in soaring stock prices.
Given these bullish fundamentals, investors could tap the potential strength of the economy in the form of ETFs with lower levels of risk and diversification benefits. Below are three funds targeting the second biggest economy of Latin America (see: all Latin American ETFs here ):
iShares MSCI Mexico Capped ETF ( EWW )
This fund is by far the most popular and liquid ETF in the Latin America space with AUM of $1.8 billion and average daily volume of more than 2.3 million shares a day. It tracks the MSCI Mexico IMI 25/50 index and holds 60 securities in its basket. The fund charges 49 bps in fees per year from investors. The product is heavily concentrated on the top firm - America Movil ( AMX ) - accounting for 17.1% share while other firms hold less than 8%.
The ETF is well spread across number of sectors with consumer staples, financials, telecom, materials, industrials, and consumer discretionary all making up for double-digit exposure. The fund has lost nearly 1% in the year-to-date timeframe and has a Zacks ETF Rank of 3 or 'Hold' rating with a Medium risk outlook.
Deutsche X-trackers MSCI Mexico Hedged Equity ETF ( DBMX )
This product offers exposure to the Mexican equity markets while at the same time hedges against any fall in the peso against the U.S. dollar by tracking MSCI Mexico IMI 25/50 US Dollar Hedged Index. The fund holds 57 securities with the largest allocation to the top firm - AMX - at 17.4%. Other firms do not make up for more than 8.20% share in the basket (read: 3 ETFs to Fight Against Global Currency War ).
From a sector look, telecom accounts for the largest share at 29.7% closely followed by financials (21.8%), consumer staples (16.4%) and industrials (12.4%). The fund has amassed $4.8 million in its asset base while trades in light volume of about 3,000 shares. It charges 50 bps in fees per year and is down 2.4% so far this year. DBMX has a Zacks Rank of 2 or 'Buy' rating with a Low risk outlook.
SPDR MSCI Mexico Quality Mix ETF ( QMEX )
This fund offers exposure to the 32 Mexican stocks that have value, low volatility and quality factor strategies. This is done by tracking the MSCI Mexico Quality Mix A-Series Index. This ETF is also highly concentrated on AMX at 16.7% and other firms hold less than 8% of total assets (read: SPDR Launches Quality ETFs Targeting Mexico, Korea and Taiwan ).
Further, it is skewed toward the consumer staples sector, which makes up for 31.9% share. Other sectors make up for a nice mix in the portfolio. The fund has accumulated $2.4 million in AUM since its debut five months ago. It charges 40 bps in fees per year from investors and trades in paltry average daily volume of 3,000 shares. The product has lost 1.7% in the year-to-date timeframe.
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