Mexican equity ETFs face volatile future

Feb 6th, 2017 | By | Category: Equities

Mexican equity ETFs have traveled a bumpy road over the last few months and there is no sign of a smoother path in the near future, thanks to political turmoil and a general performance slowdown in emerging markets.

Mexican equity ETFs face volatile future

The Mexican Bolsa Index plummeted more than 8% in the ten days following the 2016 US Presidential election.

The Mexican Bolsa Index has been extremely volatile, even if it has generated returns of more than 11% in local currency terms in the last year. The index climbed 5% in just under two months to the US Presidential election on 8 November, but then plummeted more than 8% in the next 10 days. It has since mostly recovered its losses.

It also underperformed the MSCI Emerging Markets Index in 2016, only gaining around 6% versus MSCI EM’s 11% in the same period.

Mexico’s relations with its nearest neighbour, ally and trading partner are shaky at best. Mexican President Enrique Pena Nieto cancelled his visit to the White House after President Donald Trump vowed Mexico would reimburse the US around $15bn to build the border wall. Mr Trump also threatened to slap a 20% import tax on Mexican-imported goods.

“Mexico does not believe in walls. I’ve said time again; Mexico will not pay for any wall,” Pena Nieto said in a video statement posted to Twitter and translated from Spanish.

According to IMF data, Mexico’s gross debt-to-GDP ratio deteriorated to 54% from 46% in just two years to 2015. The country’s weak budget, low oil prices and mounting social and economic tensions indicate a left-leaning President is in the running for 2018, and that could make foreign investors wary.

European investors seeking investment in Mexican equity ETFs will also need to factor in growing volatility in currency markets as Europe-listed funds tend to be denominated in dollars or pounds.

For example, the Mexican peso has weakened around 11% versus the US dollar since the election.

The iShares MSCI Mexico Capped UCITS ETF (LON: CMX1) fell more than 19% in sterling terms in the three days after the election to 11 November. In USD terms, the same fund fell 18% in the three days after 8 November.

Over the last 12 months, investors in this fund received 16.8% and 1.8% year to date in sterling terms. The underlying MSCI Mexico Capped Index is down 3.7% in local currency terms over the past twelve months and up 2.2% year-to-date.

The divergence in performance highlights the impact that currency movements have had on ETF performance – future performance is likely to be complicated by ongoing disputes between Mexico and the US for US dollar-denominated investors, as well as developments in Brexit negotiations for sterling trading lines.

The aforementioned $75.3m iShares fund costs 0.65%.

The HSBC MSCI Mexico Capped UCITS ETF (LON: HMED) in USD or (LON: HMEX) in GBP is a cheaper option for investors at 0.60% but it holds less assets at just $13.4m.

The MSCI Mexico Capped Index is composed of just 27 stocks and is concentrated in consumer staples stocks (27%), materials (19.1%), telecommunications (14.9%) and financials (14.4%). The top two holdings, telecoms giant America Movil and retail company Femsa, make up almost a quarter of the exposure.

Investors may also wish to consider the $70.9m db X-trackers MSCI Mexico UCITS ETF (LON: XMES) in USD or (LON: XMEX) in GBP, which costs 0.65%. The underlying index tracks the same number of stocks and sector weightings are just slightly different with a bit more in telecommunications (17.1%) and financials (15%).

For more diversified exposure, the MSCI Emerging Markets Index holds around 3.4% in Mexico. The cheapest is the Amundi ETF MSCI Emerging Markets UCITS ETF (LON: AUEG) for 0.20%.

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