Negotiations on the North American Free Trade Agreement (NAFTA) are under way, and although President Donald Trump has backed off some of his harsh campaign trail rhetoric aimed at NAFTA, it is believed that the Trump Administration is seeking material changes to the free trade accord. Last year, Mexican stocks and the iShares MSCI Mexico Capped ETF (EWW), the largest exchange-traded fund (ETF) tracking Mexican equities, were negatively correlated to Trump and his controversial comments aimed at Mexico. In 2016, EWW slumped 10.3%, while the MSCI Emerging Markets Index gained nearly 11%. Mexico is the seventh largest country weight in that index at 3.7%.
Speculation that the U.S. is looking for big changes to NAFTA could be prompting some investors to depart EWW. Since the start of August, EWW has lost $84.4 million in assets, while no money has been pulled from the iShares MSCI Emerging Markets ETF (EEM). Still, some market observers believe that the NAFTA talks will not roil markets on par with previous expectations. (See also: White House Said to Be Mulling Withdrawal From NAFTA.)
"The risk of a disruptive outcome from NAFTA renegotiations for the Mexican economy has fallen recently, and we assume that an eventual deal is unlikely to seriously undermine Mexican access to the U.S. market," Fitch Ratings says. "NAFTA-related uncertainty may still weigh on growth, but some aspects of renegotiation could present medium-term opportunities."
Investors' skittishness regarding EWW is not new. Likely motivated and concerned by Trump's campaign trail comments, investors have yanked $852.3 million from the Mexico ETF this year compared with inflows of $2.37 billion into EEM. Those investors are missing out because EWW is up 31.3% year to date compared with gains of almost 26% for the MSCI Emerging Markets Index. (See also: Rebounding Peso Powers Mexico ETF.)
"The final outcome is unknown, but the risks to the Mexican economy from renegotiation appear to have diminished recently," said Fitch. "As recently as April, President Trump said he was still considering withdrawal from NAFTA, and there is still scope for unanticipated changes in the administration's trade policy. But objectives published by the U.S. Trade Representative last month, while reiterating the desire to reduce the U.S. trade deficit with NAFTA countries, included maintaining mutual tariff-free access for industrial goods as a priority aim."
Mexico is Latin America's second largest economy behind Brazil. EWW has a three-year standard deviation of 17.9% compared with 16.4% on the MSCI Emerging Markets Index. The ETF allocates over one-quarter of its weight to consumer staples stocks and nearly 16% to the financial services sector. (See also: These Country ETFs Are Near Technical Buy Points.)