Is The Mexico ETF A Better Play On Latin America? [iShares MSCI Mexico Inv. Mt. Idx. (ETF)]

latin americaLatin America, dominated mostly by Brazil, seems to have lost luster since the taper talk was initiated in the U.S. last year. Apart from the external shocks, many nations in this corner of the world are lacking structural reforms and grappling with poor public finances as well as reduced foreign investment.

As per the Inter-American Development Bank estimates, economic growth in Latin America is estimated at 3% in taper-trodden 2014 and 3.3% in 2015. Investors should note that this is the best case scenario. Any anticipated acceleration in QE wrap-up in the U.S. and prolonged deceleration in China might disrupt this growth pace.

These concerns make it necessary to look for some solid options in the Latin American space. Gone are the days when Brazil was the only bright spot in South America.  In fact, Latin America’s second largest economy, Mexico, at present offers more potential than the space-bellwether.

Though Mexican stock exchanges was down about 14% last year and also suffered the most in the Latin American space to start this year, the market rebounded in late March.  Significant reforms introduced by the Nieto administration presumably played a role in lifting the cloud over the nation.

Let’s dig a little dipper into the country and its current economic outlook:

Unemployment Rate on Decline: Lower-than-expected unemployment numbers in February provided a much-needed boost to the economy. The Mexican jobless rate fell to 4.65% in February from 5.05% in January. The rate was below analysts’ expectation.

This was in contrast to Brazil’s unemployment rate which rose for two successive months. Investors should note that the Mexican unemployment fell to a 5-year low level last December.

Analysts expect Mexico to create more jobs over time. Rising wages in China, higher transportation costs; the nearness of Mexican factories relative to the U.S., and the resultant reduction in delivery times might force many manufactures to prefer Mexico to China as an off-shoring base.

Inflation at Check: Unlike Latin America’s largest economy, Brazil, the best part of Mexico is contained inflation which is helping the latter to follow an interest rate policy needed to spur the so-far-wallowing growth rate.  Annual inflation slackened to 3.94% in the first half of March, lower than the 4% upper limit of the central bank’s objective.

A softening in inflation points to no need for policy tightening, instead gives room for policy easing in case the growth scenario worsens. Mexico slashes its rates thrice last year to boost economic growth. Notably, in its latest meeting, Mexico maintained its rate at 3.5%.  Economists surveyed by Bloomberg anticipate Mexico to maintain rates until second quarter next year.

Recovery in largest export market:Mexico – an export oriented economy – is a huge beneficiary of U.S. economic revival, probably more than many other countries in the world. This was because the United States is Mexico’s largest trading partner with the latter exporting more than 75% of commodities to the former.

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