This Country is the Sweet Spot Between Emerging and Developed Markets

This ETF has big upside potential and provides portfolio diversification.

It’s widely agreed that in wake of the financial crisis U.S. economy, thanks to aggressive monetary policy and sturdy basis in capitalism and rules of law, that U.S. stocks and bonds represented the “best house in a bad neighborhood” which helped propel S&P 500 Index to 53% from 2013 to 2014.

But as other central banks have joined the quantitative easing party and valuations became attractive range of stock indices across the globe, from the German DAX to the Chinese Hang Seng have gained 18% and a whopping 29% year-to-date respectively. The S&P 500, even has stands at all-time high, has gained a much more meager 2% thus far in 2015.

But the market is a discounting mechanism and it’s too late to chase those nations that have already priced in a recovery or are front running the Central bank chicanery. There is one country that stands in the sweet spot in terms of economy, geography and solid fundamentals valuation, that leaves it poised for a big run during the second half of 2015.

Go South of the Border

I’m building a bullish position Mexico, via the exchange traded iShares Mexico Fund, ticker EWW. The Mexican stock market, like many Latin and South American markets, has experienced considerable volatility over the six months buffeted by declining oil prices and wild currency moves.   EWW, which declined some 20% from its November high is now up some 10% from its recent March low and is offering a great risk/reward entry point.

The large macro oil and currency factors have stabilized. In fact, while Mexico’s economy is fairly dependent on oil, it makes up 12% of it exports and 25% of its budget revenue, the decline in oil should ultimately mean is that recent moves by the Mexican government to open its energy industry to foreign investment will be greeted with a flood of money looking for bargains and ready spend capital expenditures to build out infrastructure. This will have ripple stimulus throughout the economy.

The decline in the peso, which has a negative impact on the EWW as it is priced in dollars, caused an outflow from the ETF from nervous investors. But the fact is a lower peso is actually a benefit to Mexico’s export economy.   While GDP is expected to slip to 3.75%, below the 4% estimate, that is still a very healthy growth rate a country that is clearly a notch above an emerging market.

The country has a solid and raising middle class giving it a robust consumer base for domestic companies to build upon. The Mexican government is not without its problems but it is basically democratic and embraces capitalism. Rule of law for respects basic contracts and it has good relations with the U.S., clearly it’s most important trade partner.

The Ahh of EWW’s Holdings

Interestingly enough, despite Mexico’s heavy weighting toward energy the exchange traded fund we are looking at, the iShares Mexico (EWW) holds no oil company stocks. It’s top 5 holdings include American Movil a wireless communications, Gropu Televiso, a cable and content provider, Fomento Económico Mexicano, S.A.B, is the largest beverage including Coke bottling plants, retailing giant Wal-Mart Mexico and Cemex (CX) the cement and construction company.  The holdings are rounded out by banks and insurance companies. Overall it’s a nice mix of technology, consumer and financial firms.

And finally of course, there is the chart. EWW recently crossed above its 50 and 100 dma at the $59 level, which offers a good risk/reward entry point.

EWW 042715

The Trade

I’m keeping this simple with the straight purchase of longer dated calls. I’m targeting the September $60 calls. Specifically;

-Buy the September $60 calls for $2.50 a contract

This will provide sufficient time for the investment thesis to play out. I have an initials price target of $64 for taking profits. There is no need to set a top loss on this limited risk position but a decline below $58 would cause me to reconsider my bullish thesis.

— Steve Smith

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About the Author: Steve Smith