ETF Traders ‘Buy the Dip’ on Mexico Stocks Amid Judicial Reform

(Bloomberg) -- Investors poured cash into an exchange-traded fund tracking Mexican stocks last week, recording its biggest weekly inflows this year as traders buy the dip following the peso’s recent plunge amid uncertainties from the country’s controversial judicial reform. 

The $1.5 billion iShares MSCI Mexico ETF, known by its ticker EWW, saw about $160 million in inflows last week — the biggest weekly gain since December. The strong flux of inflows comes as investors remain cautious over the outlook of Mexico as outgoing President Andrés Manuel López Obrador works to pass a reform that is set to completely overhaul the nation’s judicial system.

The proposal, which was approved by Mexico’s lower house last week, seeks to elect all federal judges by popular vote — raising concerns among opponents that it will put democracy at risk. The plan seeks to elect approximately half of Mexico’s federal judges by popular vote in 2025, including Supreme Court justices, and the rest in 2027, when the Electoral Court judges will be elected. 

Mexico’s peso has slumped around 14% since the election, when investors started to price in the impact of the court reform. Last week, the currency only briefly traded beyond the 20 per dollar level, suggesting investors had largely priced in the passage of the bill. Forward valuations for the MSCI Mexico index have also fallen to trade near their lowest levels in a year. 

“Expectations are already low on Mexico and the MXN closer to the 20 MXN/USD level is also more fairly valued, which can also help to entice investors back into Mexico,” said Bradesco BBI’s strategist Rodolfo Ramos.

Reform Backlash

The plan, which has been a priority for AMLO before he leaves office later this year, has drawn backlash from judges, the Mexican opposition, investors and the US, who all say it will undermine judicial independence and will give the ruling party control of the judiciary. Gabriela Siller, head of economic research at Grupo Financiero Base, said part of the peso’s stability since the lower house vote was fed by hopes that the bill could be stopped in the senate, which is due to vote this week. 

“If the reform passes, it will bring a lot of uncertainty over Mexico, and possibly drive more massive outflows from its capital markets,” Siller said. 

While risks persist, some investors are pricing in a scenario where Mexico’s judicial reform is watered down, minimizing disruptions, according to Citigroup Inc. In a note to clients last week, the bank’s chief economist for Mexico Ernesto Revilla said that new details from the reform will be crucial to calibrate the level of additional risk-premium needed, and if botched, it could “significantly harm Mexico’s growth potential.”

“Mexican equities have sold off this year, so maybe there’s a buy the dip aspect going on, and possibly the same idea around the peso,” said Brendan McKenna, an emerging markets economist and FX strategist at Wells Fargo. 

Broader Flows

Across the region, outflows from U.S.-listed emerging market ETFs that invest across developing nations as well as those that target specific countries totaled $97.3 million in the week ended Sept. 6, compared with gains of $432.9 million in the previous week, according to data compiled by Bloomberg. So far this year, inflows have totalled $3.89 billion.

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Following are tables detailing net flows for emerging-market ETFs in US dollars. The data include the holdings-weighted allocations from multi-country funds, as well as country-specific funds. Latest and historic flows are allocated using latest fund weightings (figures in USD millions unless otherwise stated):

Regional Summary

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Americas

Asia Pacific

Europe, Middle East & Africa

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