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Trump Trade Advisor's Comments Boost Mexico ETFs

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Trump’s win in the U.S. presidential election has been a pain for several foreign country investing. But it was Mexico that faced maximum wrath. Mexico has been so far been deemed as a Trump-unfriendly investment due to his plans of building a wall along the border as part of his immigration strategy and making an unwilling Mexico pay for it (read: Foreign ETFs to Win or Lose on Trump Victory).

Apart from the wall issue, restriction on outsourcing makes Mexico ETFs more vulnerable. Several auto companies have their manufacturing hub in that country. Speculation is rife that Trump may impose huge tariffs on imports from that country. Mexican peso in fact slumped over 12% to a record low when Trump announced a victor. The key Mexico ETF iShares MSCI Mexico Capped EWW lost about 10.5% (as of March 14, 2017) since Trump’s victory till the assuring comments were disclosed.

Also, Trump has indicated in his campaign that he wants to renegotiate the North American Free Trade Agreement (NAFTA) — or totally remove it. The agreement had tied up the U.S., Canada and Mexico for more than two decades. The deal permitted manufacturers and farmers to do seamless business. Now, this agreement may be threatened as Trump intends to bring back jobs offshored to countries like Mexico to America (read: How Deep is Trump Trouble for Mexico ETFs?).

However, about four months have passed since Trump’s win and we have seen many of his stringent and protectionist views toward foreign countries and trade relations getting softer in the meantime.

Is Mexico Now Safe from Trump Punch?

If this was not enough, one of U.S. President Donald Trump's most protectionist trade advisers – Peter Navarro— delivered some peacemaking comments about a coalition with Mexico on March 15. He wants the two countries and Canada to build “a regional manufacturing "powerhouse" with stricter rules of origin.”

This appeasing news was enough to firm up Mexico's peso which reached almost its highest level since Trump's election. Investors should note that Navarro was initially a strong proponent of high tariffs on goods from Mexico and China to help lower U.S. trade deficit during the election campaign. But his latest conciliatory tone meant that there is no huge risk to the 23-year-old NAFTA trade agreement.

As per Navarro, “the Trump administration is re-examining a critical component of the free trade pact: the rules of origin, which dictate what percentage of a product must be manufactured in North America.” He also went on to say that there is “a tremendous opportunity, with Mexico in particular, to use higher rules of origin to develop a mutually beneficial regional powerhouse where workers and manufacturers on both sides of the border will benefit enormously."

Market Impact

The key Mexico ETF EWW added over 3.2% on March 15, 2017. iShares Currency Hedged MSCI Mexico advanced over 1.3% following the news. The gain in currency-hedged Mexico ETF was lower as dollar lost strength on that day. PowerShares DB US Dollar Bullish ETFUUP was down about 1.2% on March 15.

ProShares Ultra MSCI Mexico Capped IMI UMXwhich looks to offer double the daily investment results of the large, mid and small cap segments of the Mexican market – added over 7.4% on March 15. The Mexican peso gained over 1.5%, the strongest level that the currency has seen since Trump’s win (see all Latin American Equity ETFs here).

Bottom Line

Trump now intends to effect “bilateral trade deals with Canada and Mexico, rather than the current three-nation framework.” Also, some changes are expected to take place in the agreement if Trump has to lower America’s $500 billion trade deficit, as per experts.

Though things should be smooth for Mexico ETFs in the near term, we believe investors should wait a little longer before being bullish on these country ETFs. This is because we are yet to know the concrete trade plans of Trump.

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