This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today’s article features Brad Jensen, managing director and senior portfolio manager with Accuvest Global Advisors.
Investors, it’s time to pay attention to Mexico.
In the course of our more than 50 visits to Mexico this year alone, and 33 years focused on the economic and financial environment in the country, it is clear to our firm that Mexico is at a critical juncture, and its presidential elections next year will be the determining factor for which way Mexico turns, politically.
Unfortunately, rhetoric coming from President Trump has weighed greatly on the populace, going a long way to aid the populist candidate. If the elections were held today, there is little doubt that the radical populist Andres Manuel Lopez Obrador (AMLO) would be elected and the result could be quite negative.
In our most recent trip, we spent time with a few candidates, and were on hand for the announcement of the Institutional Revolutionary party’s official candidate, Jose Antonio Meade. In a normal cycle, these individuals would be viewed as relatively strong candidates and possible leaders. In the current environment, however, the country is fixated on the negativity coming from Washington related to trade generally and NAFTA specifically.
Investment in the country has slowed, and risks are rising. Foreign direct investment has dropped from $3.9 billion for the 12 months ending Dec. 31, 2012 to $491 million for the 12 months ending Sept. 30, 2017.
Fortunes have been won and lost in the extreme environments seen in Mexico over time. Crises have wiped out wealth for many, while others have built empires. Now is the time to tune in your scanner; attentiveness to the issues at hand is imperative.
Our view currently is to be naked any exposure to Mexican assets. This has been beneficial, as the momentum of the MSCI Mexico Index has significantly underperformed other markets in the ACWI (second-worst USD price return over the last three months, down 11.4%).
Sources: Bloomberg, Accuvest
For a larger view, please click on the image above.
Over the course of the next 12 months, however, there may be a chance to take positions that could reward long-term portfolios. One way to play this election opportunity and gain exposure to Mexico is through an ETF. We currently prefer the iShares MSCI Mexico Capped ETF (EWW).
We are trying to thread a tight needle with our outlook, but the view driving our strategy contemplates AMLO winning the election on July 1. Given the stakes and potential loss of power of the ruling party, there could be considerable upheaval and asset price discounts if the election is contested and results not final for a period of time.
The markets will have awoken to this possibility leading into the election, and will begin talking about the outcome being a Chavez-lite result. Already-cheap markets would look even cheaper in this scenario.