30 ago. 2012

Forget Brazil; The Mexico ETF Is Hot (EWW)

August 27th, 2012

Brazil, which was once foreign investors’ favorite investment destination in Latin America, is currently facing some significant challenges. The country is expected to grow at just about 2% this year, a sharp reversal from 7.5% growth in 2010, primarily as a result of slowdown in China and recession in the Euro-zone.
On the other hand, Latin America’s second largest economy continues to put in a robust performance. Mexico’s economy grew at 4.1% for 2Q 2012 (tenth consecutive quarter of growth), though down slightly from 4.5% growth in the previous quarter. Growth has been driven by the increase in domestic consumption, supported by rise in job creation and expansion of bank credit. While credit as a percentage of GDP has doubled in Brazil to about 50% in last ten years; in Mexico, it is around 20%, indicating a significant room for expansion.recent report by Nomura states that  Mexico will likely overtake Brazil as Latin America’s largest economy, though it still depends among others on continued growth in the US economy and crime situation in the country. Per IMF, Brazil will grow at 2.5% this year while Mexico will grow at 3.9%. While the domestic demand remains strong in Brazil, Mexico is more dependent on external demand (exports at 30% of GDP versus 14% for Brazil). As almost 80% of its exports are headed to the US, Mexico is heavily dependent on the US economy.Exports bounced back in July(after three months of declines) on the back on rising demand from the US, which also helped bring down the unemployment rate to its lowest level in more than 3-1/2 years.
Mexico also benefits from rising manufacturing costs in China as some of the manufacturers shift production closer to home. Labor costs in China have risen by 12%-14% per year, in dollar terms, from 2002 to 2009; compared to about 1% in Mexico.Further shipping costs have also been rising and as a result some manufactures have shifted production to Mexico, where wages are still significantly lower than those in the US.
Brazilian stock market index Sao Paulo Bovespa has added just 2.9% this year while its Mexican counterpart IPC All-Share is up 8.5% year-to-date. Mexican peso is up about 6% against USD this year, while the Brazilian Real is down about 9% (partly due to central bank’s intervention).
The Bank of Mexico has kept the key rate unchanged at 4.5% since 2009 as the inflation has generally remained within its target range of 2% to 4%. The central bank expects the inflation to come down to 4% by the end of the year from 4.5% currently. Country’s foreign reserves have risen to $162.7 billion as of the end of June 2012.
Looking at the negatives, the country suffers from a high crime rate, drug-related violence and income inequality. About 46% of Mexico’s population lives in poverty (per World Bank) It remains to be seen whether the new government led by the President elect Nieto, which assumes power in December, will be able to take necessary steps to address these challenges.
iShares MSCI Mexico Investable Market Index (NYSEARCA:EWW)
EWW tracks the MSCI Mexico Investable Market index which consists of stocks traded primarily on the Mexican Stock Exchange. The index is a capitalization weighted index that aims to capture 99% of the total market capitalization.
Launched in March 1996, the fund now has more than $1.2 billion in AUM. The assets are invested in 42 holdings with an average market cap of $30.33 billion. Consumer staples (31.9%), telecom (23.9%) and materials (16.5%) are the top sectors that the fund is invested in. Growing consumer demand in the country suggests that the fund will benefit from its heavy exposure to consumer staples and telecom sectors.
The fund charges 52 basis points per year in expenses and currently has a 30-say SEC yield of 1.31%. The ETF has gone up 17.02% year-to-date.