After their strong performance on Friday and since domestic equities failed to maintain their daily highs, it’s not
surprising that the ETFG list of Behavioral Quant Movers would include some of
the larger international ETFs.
Call it
“Central Bank Friday” beginning in the east where the PBOC cut rates for the
first time since 2012 amid slowing growth to Europe where Mario Draghi’s
statements that inflation needs to be brought back to 2% “without delay” lit a
fire under European equities that had already been trending higher following
his press conference on 11/6.
The larger iShares MSCI EMU ETF (EZU) saw its behavioral
score rise 16.5 points while the Euro-hedged WisdomTree Europe Hedged Equity
Fund (HEDJ) was up nearly 25 points and has risen all the way to number 11 on
our list of top 25 ETF’s behavioral scoring ETFs where it joins 7 other
international ETFs.
And while China may have been the only emerging market on
anyone’s mind last Friday, the real action was south of the border where the
ETFG Latin America Index was up 5.41% as investors found a whole bunch of new
reasons to love Brazil again. In many
ways, the story of Brazil and Mexico closely resemble the European model; in
Brazil the story of rising rates, weak growth and political uncertainty
surrounding the re-election of Dilma Rousseff contrasts sharply with Mexico
where a stronger economy with its deep ties to the U.S., combined with the
election of Enrique Peña Nieto and promises for major reforms to the
state-dominated energy sector has helped make the country a darling for
international investors.
Mimicking the
relative underperformance of perennial problem child Italy to relatively more
stable Spain, before Friday’s rally the iShares MSCI Mexico Capped ETF (EWW) is
up .68% in 2014 compared to a negative 3.41% for the iShares MSCI Brazil Capped
ETF (EWZ) while over the last three years EWZ has an annualized return of-5.97%
to EWW’s 10.41%.
What prompted this stunning reversal of relative
momentum? On the surface, EWW enjoyed a
solid 1.44% advance on Friday as investors digested lower economic growth
forecasts for 2014 and 2015 while EWZ rallied sharply, up 6.83% and with the
Real gaining ground against the dollar for the first time in almost a month on
news that President Rousseff may be close to a new economically savvy finance
minister.
But on deeper inspection, the
real story may be the shift in political instability from Brazil to Mexico. President Peña Nieto continues to deal with
the fallout from allegations of crony capitalism as well as the murder of 43
student teachers while the instability surrounding the recent elections in
Brazil as well as alleged corruption at Petrobas begins to fade. Given the weight of Brazil in the largest
Latin American tracking ETF, the iShares Latin America 40 ETF (ILF), at 45%
compared to Mexico’s 31.7% and the relative underperformance of EZW to EWW over
the last three years (-5.97% to 10.41%), a change in relative momentum could
help lift ILF from its multiyear momentum lows versus the S&P 500.
While the recent outperformance of Brazil among Latin
American markets may yet prove to be short-lived, it does raise the question of
whether Mexico can expect to trade-in line with its peers to the south or its
larger trading partner to the north.
Given the highly integrated nature of our two economies, Mexican stocks
could find themselves lagging other international markets if U.S. equities do
begin to lag as investors seek out markets with more liberal monetary
policies. Porfirio Diaz may have it
right after all.
Thank you for reading ETFG Perspectives!
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