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Mexico or France: Which Country ETF Wins Cinco de Mayo 2018?

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Cinco de Mayo, meaning the fifth of May in Spanish, is a day of gratification for all Mexicans. The day honors the Mexican army's incredible victory over the French militia in the Battle of Puebla in 1862. Though the victory was short-lived as the French finally took over, the day became commemorative of Mexican ethnicity and is widely celebrated even in the United States.

So, let’s play a mock war between Mexico and France. This mock fight will give investors a fair idea of the present stock market scenario of the two countries.

iShares MSCI Mexico Capped ETF EWW) – Up 4.5% YTD (as of May 3, 2018)

The Mexican economy can be represented by the pure-play ETF EWW. Mexican economic activity increased in the first quarter, marking the fastest growth rate in six quarters thanks to a pickup in industrial production and services.

The economy expanded 1.1% sequentially in the first three months of 2018, higher than 0.8% recorded in the previous period. The recent recovery in oil prices probably brought relief for the economy. However, the year-over-year growth was 1.2%, below 1.5% logged in Q4 of 2017.

However, there are concerns related to NAFTA. The United States and its NAFTA partners are striving to “reach a tentative deal in the coming days”. U.S. Trade Representative Robert Lighthizer said this week that if a deal to review NAFTA cannot be reached in about three weeks, its approval by the U.S. Congress could be at risk.

On the other hand, Citigroup warned that “Mexico’s peso would swoon” as its deficit swells under Andres Manuel Lopez Obrador, the presidential candidate who took the lead in polls ahead of the country’s presidential election on July 1.

Citigroup also projected that “the economic platform of the front-runner in the July 1 elections would cut 0.7 percentage points from projected economic growth and raise inflation estimates by 23%.”  The fund EWW currently has a Zacks Rank #4 (Sell).

iShares MSCI France ETF (EWQ - Free Report) – Up 0.6% YTD (as of May 3, 2018)

On the other hand, the French economy grew 0.3% sequentially in Q1 of 2018, slowing from a 0.7% growth in Q4 and missing market expectations of 0.4%. The latest growth reflected the weakest clip of expansion since the third quarter of 2016.

Subdued household consumption and slower fixed investment weighed on the growth. There was a sluggishness in corporate investment. Exports dropped 0.1% in Q1, easing from a 2.5% rise in the previous quarter. The economy expanded by 2.1% year over year versus a 2.6% growth rate recorded in the previous period.

Still, the lure of French investments is not absolutely dull. The European Central Bank (ECB) has been accommodative. The bank's net asset purchases are likely to run at a monthly pace of €30 billion until the end of September, or beyond, should the need be (read: Currency Hedged Euro Zone ETFs to Buy After ECB Meet).

Economists at Capital Economics expect the Euro zone growth to rebound in the range of 0.5%-0.6% in Q2 on strong consumer confidence. EWQ has a Zacks ETF Rank #2 (Hold).

The Winner

Like the actual war, the Mexico economy has emerged winner in Q1 of 2018. Its ETF also performed better than the France ETF so far this year. However, over the long term, the battle might present us a different victor given uncertainties related to the election and NAFTA deal in Mexico (read: ETFs to Watch on NAFTA Optimism).

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