The Mexico large exports to the United States makes it highly dependent on the economic conditions in the United States. The Mexican Peso exchange rate is affected by factors such as the terms of trade, interest rates and current account performance. The leading exports of Mexico to United States include oil and gas as well as manufactured goods (Organisation for Economic Co-operation and Development, 2013). Periods of economic growth and recessions in the United States are mirrored in Mexico economy where a fall in the US dollar against major currencies leads to a greater fall in Peso against those other currencies.
Exchange traded funds (ETFs) which were introduced in Mexico in the year 2002 had a low growth resulting from lack of diversification of investments. However, there was dynamic growth in 2005 with the introduction of cross listed ETFs where they were available on various exchanges in different countries, enabling them to track US stock market indices. Their introduction attracted more Mexican investors and there were nine products being offered by the end of 2004 and over two hundred by 2009, as compared to only one in 2002. This growth was also facilitated by flexible regulations, competition between the ETF providers, and diversification of investment options and encouragement of ETF providers to offer such products.
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The rate of penetration of Information and communication technology also contributed to growth since more population had access to the internet and could therefore participate in electronic trading, easier exchange of information, increased efficiency by limiting errors and lowering trading costs as well as enabling cross listing.
In 2008, there was a financial crisis in United States which spread to other parts of the world and negatively affected commodity prices such as crude oil. Oil prices traded to a low of $30 a barrel compared to a price of above $100 a barrel a year earlier. The effect of the global crisis caused a drop in remittances inflows to Mexico and a lower exports to United States leading to Mexico economy to contract 6.6% in 2009 and the Mexico Peso (USDMXN) to weaken by 25%. Economic contraction in the United States resulted in lower consumer demand and led to lower demand for goods from Mexico. This negatively affected Mexico’s GDP growth, employment, production in the manufacturing industry and investor confidence . The financial crisis also prompted investors who had placed their funds in Mexico to move their funds to safe-haven investments leading to increased demand for dollars, and putting pressure on the Mexican Peso (Fratzscher, Thimann, & Sáez, 2009). Below is a historical graph showing the trend of Mexican peso against the US dollar over the years:
The appreciation of oil prices in 2009 and the recovery the United States and global economy led to the currency appreciating against the dollar, to an annual average of 13 to the US Dollar. The current rate is expected to remain stable, especially with the stability of oil prices. Continued recovery of Mexico's export market has also enabled the country to accumulate more foreign exchange reserves, strengthening the currency.
The shares MSCI Mexico Capped ETF tracks MSCI Mexico Investable market index a broad based index that includes Mexican companies. Sectors represented in the index are materials, telecommunication, financial and consumers. The main aim of the fund is to replicate the capital and income return of the tracking index, through holding all the shares substantially based on their index weighting. They track the performance of the underlying securities and are susceptible to changes in the performance which they underlie, their performance being linked to them.
Similar to the exchange rate, the fund lost hugely between 2008 and 2009, which was a result of the dismal performance by the constituent shares due to the global financial crisis. ( Blitz & Huij, 2012) . The fund had been performing excellently prior to 2008 therefore supporting the stability of the Mexican peso at the time.
An improvement of the US domestic data and the improved Mexico growth increased investor confidence leading to investment after the 2008 global financial crisis. Mexico has experienced positive growth which has seen an increase in Foreign Direct Investment into the country. Poor performance of government bonds and corporate bonds and a strengthening equity market that has led to the resurgence of the EFTs in Mexico.
References
Blitz, D., & Huij, J. (2012). Evaluating the performance of global emerging markets equity exchange-traded funds. Emerging Markets Review
Fratzscher, M., Thimann, C., & Sáez, L. C. (2009). The transmission of emerging market shocks to global equity markets . Frankfurt am Main: European Central Bank.
Organisation for Economic Co-operation and Development. (2013). Mexico 2013 . Paris: OECD
