EC Which Country ETF Wins Cinco De Mayo 2015?

Cinco de Mayo, meaning the fifth of May in Spanish, is a day of gratification for all Mexicans. The day honors the Mexican army’s implausible victory over the French militia in the Battle of Puebla in 1862. Though Mexico’s victory was short-lived as the French finally took over, temporarily establishing an Emperor, the day became commemorative of Mexican ethnicity and is widely celebrated even in the United States.

Over 150 years since the actual event, the glory of the 1862 win is perhaps fading. What if we fight a mock Battle of Puebla this year using Mexico and France ETFs as proxies? After all, this mock brawl will not cause any bloodshed; it will just give investors a fair idea of the present stock market scenario of the two countries.

There is high chance that this mock fight will present us with a different victor, but deciding on a country ETF winner on the basis of its potential and past performance is an interesting idea.

iShares MSCI Mexico Capped ETF (EWW)

The Mexican economy can be well-translated by the largest pure play ETF EWW. The second largest economy of Latin America also turned out as one of the strongest economies in 2012 and in the early part of 2013.

However, the year 2014 was saddled with the oil price rout. Notably, oil revenue makes up about a third of the Mexican government’s revenues. As a result, EWW was down 8.3% over the last one year.

Though the recent recovery in oil prices should bring relief for the economy, Mexico cited softness in manufacturing exports and demand-side inflation. As a result, the government slashed its 2016 growth and spending estimates on oil weakness at March end.

The economy will likely expand in the range of 3.3% to 4.3% in 2016, down from 4.9% projected earlier. At first glance, this comes as a setback, but a growth rate over 3% is still a tall order for many developed nations.

Investors should note that, Mexico is a low-cost manufacturing destination and is fast replacing China’s dominance over manufacturing offshoring activities. Steep wage rises in China are basically facilitating Mexico’s emergence as an offshoring haven.   

Moreover, Mexico is a huge beneficiary of U.S. economic recovery with the latter accounting for more than 80% of Mexico’s exports. A weaker peso also intensifies Mexican exports. Overall, open market policies, fiscal and labor reforms and the rising middle class population should help Mexico to deliver stronger numbers over the long term, provided oil keeps firming (read: Are Mexico ETFs Ready for a Rebound?).

EWW has a Zacks ETF Rank #3 (Hold). The fund is 1.8% down so far this year. However, loss heaped on over the last one week (as of May 1, 2015) as the Fed hinted at no hurry in hiking rates. The Mexican policy is highly co-related to the U.S. Per Bloomberg, a minor rate benefit in the Mexican peso versus the greenback might spur investors to abandon Mexican stocks.

Bloomberg also noted that the difference between key rates of Mexico and the U.S. is 2.75 percentage points, which is the smallest since the former took on a new benchmark seven years back. Moreover, weakness in the greenback makes peso stronger and in turn mars Mexico’s export. As a result, EWW lost over 3.2% in the last one month (as of May 1, 2015).

iShares MSCI France ETF (EWQ)

Mexico may be slowing, but France, being a Euro zone economy, has been struggling. The French market saw a great deal of investors’ zeal at the start of 2015 on the ECB’s initiation of the QE measure. However, an almost bogged-down French service sector in April and deflationary pressure in the first quarter of 2015 hinted at a far from full-fledged recovery.

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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