Mexico (EWW) : Is the worst going to happen?

The iShares EWW ETF (MSCI Mexico Index) created in 08/2007 is listed on the NYSE in USD and seeks to replicate the MSCI Mexico IMI 25/50 index composed of the main Mexican stocks, selected according to the size of their market capitalization. This index covers 75% of the Mexican market capitalization.

The fees for this ETF are 0.48% and the AUM are approximately $ 1 135M. Replication is physical and there is a dividend policy.

Alternative ETFs: DBMX (Deutsche-x trackers)

 

Index & components

This index is fairly varied with four sectors accounting for 72% of market capitalization, which are consumer goods (24.7%), followed by telecoms (16.4%), financial sector (15.7%) and commodities (15.3%). The top 10 stocks, which include giants such as America Movil (Telecoms) and Cemex (cement), account for 60% of the index's capitalization.

This tracker embeds the risk related to the Mexican peso, which can be quite erratic and depends largely enough on US policy. Mexico is one of the world's 20 largest economies and the second largest in Latin America (behind Brazil), but remains highly dependent on the United States. GDP growth has been above 2% in 2016 even though it is being held back by poverty and the underground economy and should continue at the same pace in 2017 despite the September earthquake and the uncertainty caused by ongoing NAFTA negotiations.

Since 2012 the peso is under pressure despite a boom in the automotive industry, Mexico becoming the largest car producer in Latin America. Mexico relies heavily on its foreign trade whose share in GDP is about 65% while the US absorbs 80% of Mexican exports. Mexico exports mainly to NAFTA and the European Union, mainly electrical and electronic equipment, vehicles and oil. On import the main partners are NAFTA, China and Japan. Mexico has benefited in recent years from the economic strengthening of the United States for its exports, even if they were penalized by the sharp drop in oil prices in 2015.

As a result of the fall in crude prices, the trade deficit has risen sharply to $ 11.9 billion in 2015. Mexico ranks among the world's largest producers of coffee, sugar, corn, oranges, avocados and limes, as well as minerals, including silver, fluorite, zinc and mercury, and it is the world's 5th largest oil producer. The oil company PEMEX is considered the second most powerful company in Latin America. Mexico is also the fifth largest beer producer and the second largest exporter in the world. The aerospace sector has grown strongly, bringing together nearly 190 companies (including Bombardier, Goodrich, Safran and Honeywell) and is also one of the top ten car producing countries. The information technology and software sectors are also experiencing a real dynamism, driven by the quality of the workforce and the low operating costs, which allows the establishment of call centers. The industrial sector represents about 1/3 of the GDP against 60% for the tertiary sector, but it is now in the line of sight of D. Trump who wishes to renegotiate the terms of the NAFTA.

The Mexican economy is modernizing, flexible and adapting to the new situation. Inflation is at its highest for 8 years at more than 6%, because of the fall of the peso which remains an indicator to monitor.

 

Latest developments

After falling by nearly 11.8% in 2016, the Mexican index is currently up 13.9% in 2017 despite a strong set back of nearly 12% since September due to the intransigence of the USA on NAFTA negotiations. The US appears to be seeking to impose a tariff on imports from the Mexican auto industry, arguing that Mexico is unfairly competing for low wages, and may require a vehicle to contain 85% of North American parts, and  half of these coming from the United States; in this case, Mexico would probably leave the negotiating table and set tariffs with the US in accordance with WTO rules.

The fourth "round" of talks ended on October 17 in a tense climate, making plausible an outright denunciation of the agreement, which could penalize all stakeholders. In terms of tariffs, such an outcome would refer each of the three countries to what it grants multilaterally to all other WTO members, and there the United States has a lot to lose, especially the American farmers who will no more have access to Mexican market. In return, the United States could not impose very high tariffs on Mexican industrial products, but would be free to impose anti-dumping duties on Mexico and Canada, which could inflict serious damage on some sectors (such as automotive) in these two countries. But to weaken Mexico is to weaken the peso-which is already happening-which boosts the competitiveness of Mexican products in the US market.