EWW: Buying Mexican Equities Was A Mistake I Made In 2024 (Rating Downgrade)

seekingalpha11-08

Evaluating the iShares MSCI Mexico ETF as a potential investment, focusing on its objective to track Mexican equities.Reflecting on the poor performance, I downgrade EWW to "Hold" due to missed growth...

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This fund's objective is to \"track the investment results of a broad-based index composed of Mexican equities\". I covered EWW earlier this year when I proposed it was a good play ahead of the US election season and a correct prediction on President Trump's victory. I saw Mexican equities as getting a boost from escalating geopolitical risks in China and elsewhere, and I also believed the Mexican economy was in a position to see healthy growth in the second half of 2024. Well, in hindsight, this was one of my worst calls of the year. EWW has dropped markedly and dramatically under-performed the S&P 500: Fund Performance (Seeking Alpha) Clearly, this hurts. But making mistakes is a part of investing, and learning from them can often make the loss worthwhile in the long run. With this perspective, I thought it would be useful to reflect on this call: what went wrong, why it went wrong, and how things may or may not change in the future. As a result of this review, I am reluctant to keep my bullish optimism in place on Mexican equities and EWW by extension. I am therefore downgrading my rating to \"Hold\" - and I will explain why in detail below. Where I Erred #1: Underestimating Weaker Peso's Impact On EWW One of the primary reasons my thesis turned out to be a poor one was because I under-estimated the impact of a weakening local currency on the share price of EWW. As the US economy gained strength in the second half of the year, the USD simultaneously rose because it will limit how quickly the Fed will act on rate cuts going forward. This is certainly relevant for most investments, but it is especially true when considering funds like EWW that are priced on US exchanges but whose underlying companies are based in another country. The reason is straightforward. When U.S. investors buy foreign stocks (whether directly or through an ETF) they face currency risks that are more pronounced than when said investor buys a share in their home country. The reason being they earn a return from the underlying stocks in those stocks' local currencies, and then the return is impacted by currency fluctuations. In this case, between the USD and the Mexican peso. The net result here is that as a local currency depreciates, so too will the value of the underlying investments once they are converted to USD. And this is precisely what has been happening with the Mexican peso as 2024 has progressed. This weakening also has accelerated going into, and immediately after, the US presidential election: Mexican Peso vs. USD (Yahoo Finance) This is a really critical component of international investing, and it is why I choose to highlight it as the first part of my analysis. While I see some bright spots in the Mexican economy going forward, those have not been strong enough to override both macro-headwinds and currency risks. I was naive to think that a strong US economy would not have a marked impact on emerging market currencies (such as the Mexican peso) and was too optimistic about my outlook for EWW as a result. The net result was a good learning experience for me and also forced my hand to downgrade my outlook for EWW going forward, as I don't expect a dramatic shift in this dynamic any time soon to reverse the trend. I feel this attribute alone helps to support a move to \"hold\" right now. Where I Erred #2: Any Potential Export Boost Will Take Time A second topic I covered in great detail at the beginning of the year was how I believed a softening of trade relations between the US and China would be to offshoring production, logistics, and importing from other parts of the world. A natural beneficiary - as I saw it - would be Mexico, given its proximity to the US and the fact it shares an accessible border. This logic still stands today, but the fact is it is going to take more time to really develop into an actionable investment thesis. As we can see, total manufacturing and exports to the US have risen over time, but there hasn't been a marked jump in 2024. This has limited the investment thesis for funds like EWW and suggested I was a bit \"too early\" with this call: Total Exports (Mexico) (Dallas Federal Reserve) Now, it is true that Mexico has a free-trade agreement with the US (and Canada for that matter), and cross-border trade has certainly been growing given the desire by many in the US to reduce the country's reliance on Chinese manufactured goods. But, as I just mentioned, this is not something that is going to happen overnight. Moving supply chains will take effort and time, and while I believe this continues to be a tailwind for EWW, it is perhaps a more long-term play and investors should not necessarily expect a short-term boost from this idea like I hoped. The impact on EWW is certainly clear because the fund is top-heavy with the Consumer Staples sector. These are exactly the types of products that Americans look to import, so EWW's underlying holdings should indeed see a rise in demand the US demands more and more from our southern neighbor: EWW's Sector Holdings (iShares) What I am driving at here is I am not bearish on this thematic idea. I see value in Mexican equities and I will continue to hold my core position. But I also have to be realistic, admit I was early on this call, and justify why I don't feel comfortable continuing to project a \"buy\" opinion on this fund. The \"Trump Tariff\" Risk Should Not Be Ignored Heading into 2025, there is another factor investors need to take seriously before buying EWW (or Mexican equities more generally). This has to do with tariffs, with President-elect Donald Trump has promised to impose on the nation's goods if action is not taken with respect to cross-border movement and drug trafficking: Every damn thing that they sell into the United States is going to have like a 25% (tariff) until they (Mexico) stop drugs from coming in.\" Source: Reuters Of course, this is just a projection at this point. It may not necessarily come to pass, or actual tariffs could wind up being lower. But this is a risk that investors should at least take seriously when doing their analysis on whether EWW is a buy or not at present. For me, it presents a serious cloud. To be fair, this is not \"unique\" to EWW. While Mexico does share a border with the US and relies heavily on trade between the two countries, many other nations also depend on the US for trade and are in the \"Trump cross-hairs\" when it comes to tariffs. Current pledges show the potential for a dramatic increase in tariffs globally, if everything Mr. Trump has mentioned actually comes to pass: Potential For Tariffs Under President Trump (Bloomberg) This is not meant to be alarmist. I highly doubt all of the proposals are going to become law. But remember that the risk is elevated for EWW. Not only is Mexico one of Mr. Trump's prime targets at the moment, but this particular ETF is filled with Consumer plays, as well as Materials and Industrials - all areas that rely on economic activity and trade to perform well. For these reasons, shifting to a more cautious stance on EWW makes sense to me. Big Money Is Sitting On The Sidelines I will now shift the focus back to Mexico as a whole. One thing I look at when I consider non-US exposure is whether institutional money is favoring the country. What I mean is, if businesses and institutions are investing heavily in a particular region, I start to get interested. If they are shying away from it, then that factors into my analysis on whether or not this is a desirable place to be. When it comes to Mexico, last year saw a flurry of M&A activity that got me excited to project continued activity in 2024. This often can be a boost to equity prices because it shows confidence in the market and often results in improved margins for the companies that are consolidating. Unfortunately, activity has ended up being quite muted in 2024 (thus far), and with the end of the year approaching I doubt that is going to change: M&A Activity in Mexico By Year (Completed Deals) (PwC) The signal here is that big money moves have been slowing - probably due to uncertainty in the political realm. This is true both of domestic policy (Mexico also had elections earlier this year) and US-induced political uncertainty. In my view, I think exercising some prudence here is consistent with what the professionals are doing. That can often be the right move. Bottom Line Mexican equities have really taken it on the chin and I have paid the price in 2024. Fortunately, there are some reasons to be optimistic. Mexico could benefit from offshoring from China (and elsewhere), economic activity has been steady, and the battle against inflation has been fairly successful there as it has in other countries: Mexico's Inflation Stats (Banco de México)  These positives aside, there is no denying that EWW faces some headwinds. There are potential tariffs on the horizon, political uncertainty both in-country and out, and a declining peso which has the potential to hurt US-based investors in Mexican equities. When I add all this up, I have to admit to myself I made a mistake buying EWW earlier this year and I need to downshift my expectations in the short term. This supports my downgrade to \"hold\", and I would urge my followers to approach any new positions selectively at this time.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"-1","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2482823464"}