This Mexican stocks ETF is leaving US equities in the dust

Key Points
  • The S&P 500 is up 10.7 percent this year, but the iShares MSCI Mexico Capped exchange-traded fund (EWW) has surged 30 percent.
  • A UBS strategist said Mexico's outperformance is due to a combination of three factors: a weaker dollar, less concern about U.S.-Mexico trade relations and better-than-expected economic growth from Mexico.

U.S. equities have done well this year, but a widely followed exchange-traded fund that tracks Mexican stocks is doing far better.

While the index has climbed 10.7 percent, the iShares MSCI Mexico Capped ETF (EWW) has risen 30 percent in 2017.

EWW vs S&P 500 in 2017

Source: FactSet

The ETF's three best-performing stocks this year are hotel operator Hoteles City Express, up 49.7 percent, airport operator Grupo Aeroportuario del Sureste, up 48.7 percent, and telecom Axtel SAB, up 45.4 percent.

Alan Alanis, Latin America equity strategist at UBS, said the ETF's surge is a result of three factors: a weaker dollar, less concern about U.S.-Mexico trade relations and better-than-expected economic growth from Mexico.

"The first, and by far the most important one, is currency. The Mexican peso went from being the worst-performing currency against the dollar to being the best-performer in 2017," Alanis said. "Of the 30 percent gains in the EWW, two-thirds of those are currency-related."

The Mexican peso has surged more than 15 percent against the U.S. dollar this year. It has also spiked approximately 20 percent since hitting an all-time low against the greenback in January.

Mexico's currency was under pressure for the latter part of the U.S. presidential election and throughout the first couple of months following President Donald Trump's victory. Trump campaigned on a tough trade stance, pushing for the renegotiation of the North American Free Trade Agreement.

Investors were dumping the peso as they weighed the possibility of a trade war with Mexico.

But expectations of a U.S.-Mexico trade war have been subdued, Alanis said. Last month, the U.S. and Mexico reached a deal ending a dispute over the sugar trade between the two countries. The agreement averted U.S. duties on sugar imports from Mexico and retaliatory duties on Mexican imports of American high-fructose corn syrup. The two countries, along with Canada, are expected to begin talks on revamping the NAFTA next month.

Entering 2017, investors and economists believed that the looming threat of a U.S.-Mexican trade war along with a free-falling currency would slow down Mexico's overall economy. That said, the Mexican economy has proven resilient thus far.

Mexico's gross domestic product grew 2.6 percent in the first quarter on a year-over-year basis, according to INEGI, the country's national statistics agency.

"It's not spectacular growth, but it's better than people expected," said Alberto Ramos, head of Latin American Economics at Goldman Sachs. "Towards the end of last year, the consensus was the [Mexican] economy would decelerate a lot, with consensus around the 1 percent handle. Now the consensus has increased and is closer to 2 percent."