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ETF Specialist

Reform Momentum in Mexico Could Be Positive for This ETF

The America Movil overhang is less of an issue now.

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Recent reforms in Mexico have not gone unnoticed by the global investment community. Since taking office in December last year, President Enrique Pena Nieto appears to be on track for a year of big-bang reforms. With the support of Congress, he has passed education reform and is in the process of opening up Mexico's highly concentrated telecom and television markets. On the agenda for later this year are measures aimed at increasing tax revenues and opening up the state-owned energy sector. These moves should help set the foundation for healthy growth in the medium term. Earlier this month, Standard & Poor's upgraded the outlook for Mexico's sovereign credit rating to positive from stable, signaling a possible upgrade in the next 18 months. That same day, the Mexican peso hit an 18-month high against the U.S. dollar. Some of this appreciation has been driven by strong foreign investment flows into Mexico. The Mexican central bank reported that in February, foreign investors poured a record $80 billion into the nation's stocks and bonds, almost 5 times more than flows into Brazilian securities over that same span.

One of the few ways to gain direct, diversified exposure to Mexican stocks is via  iShares MSCI Mexico Capped (EWW). Like many cap-weighted emerging-markets equity indexes, EWW's index has some large single-stock exposures. For EWW, this outsized exposure is telecom giant  America Movil (AMX), which currently accounts for about 17.5% of this fund's portfolio. The aforementioned moves toward reforming the domestic telecom market, as well as a less favorable regulatory environment in some of America Movil's other main markets, have weighed heavily on the stock over the past few months. So, while America Movil used to be a significant overhang on EWW, its current valuations suggest that a more challenging operating environment for the company is already priced in.

Patricia Oey does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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