2023-12-05 04:13:50 ET
Summary
- EWW provides exposure to Mexican majors, but we worry about the impact of minimum wage increases on earnings of Mexican corporates.
- Consumer staples and financials are attractive due to economic resilience and potential benefits from higher interest rates.
- However, the substantial minimum wage increase that affects 33% of the workforce is possibly a major earnings headwind, especially with global recessions still on the table. Pass on EWW.
The iShares MSCI Mexico ETF ( EWW ) gives investors exposure to Mexican majors. While we like the consumer staple and financial exposures for their economic resilience and favourability in a higher rate environment, there is a concern on the horizon which is the imminent increases coming in minimum wage, that could have an outsized impact on the earnings of Mexican corporates. With a recession still on the table in the economic discussion, this creates two avenues of troubles for Mexican corporates that has us looking elsewhere for the moment, at least in terms of broad market exposures.
EWW Breakdown
The EWW has substantial exposure to consumer staples and financials. Included in consumer staples at least in terms of resilience are the large communication exposures, specifically to telco.
In general, these exposures will be attractive from an all-weather perspective, and in the case of financials may benefit explicitly from the increase in rates that has happened globally .
Minimum Wage
The issue now is that the government has stepped in with a very substantial minimum wage increase of 20% across all jurisdictions. 33% of the Mexican registered workforce are on minimum wage, and therefore the impacts of this are far reaching. Where a collective bargaining agreement as seen in the US is a major threat to corporate earnings, and is responded to in kind by shareholders, this represents a far more sweeping measure that will seriously impact bottom lines. The fact that Mexico has one of the lowest GDP per hour worked statistics among OECD countries, the labour intensity of the economy is going to be structurally higher, and therefore corporate income statements are likely to be more levered to labour in general.
Follow On
There are follow on consideration here as well. A higher minimum wage causing a sweeping effect on the workforce will be rather inflationary. This may require even higher rates, which is going to further affect corporate bottom lines with higher interest expense. The Peso is intrinsically dollarized, but even higher rates could see it even outperform relative to the dollar, and remittances may not go as far in that case. This could mean recessionary forces on top of higher domestic labour costs, although at that point at least rates would likely come down.
With this all relating to the election cycle, we could see more trouble as candidates try rally their popular bases, likely all at the expense of corporates.
The PE is 11x, which is not high, but imminent earnings dangers need to be accounted for. There are stocks with lower multiples that have much better prospects.
The expense ratio for the ETF is also 0.5%, which is higher than what we'd like, even relative to the decent 9% earnings yield.
On exposure to the minimum wage effect on fixed cost structures, we pass on EWW.
For further details see:
EWW: Change In Minimum Wage A Threat To Mexican Corporates