Banxico's survey of economists on May  2 has GDP falling to 2.26%, and inflation rising to 4.16%, meaning interest rate cuts likely on hold.

'De-Risking' from China seen as a long-term positive for Mexico.

Mexico investors may be in for a volatile few weeks with the economy petering out even as inflation rises, casting serious doubts about interest rate cuts next week. Global investors who like the long-term view of Mexico may want to sit on the sidelines to see if the Mexican stock market tracks the macro trends of the country.

The iShares MSCI Mexico ETF is up 12.45% over the last six months, clobbering large Latin American rival, the iShares MSCI Brazil , which rose just 2.45%.  But year-to-date shows the EWW ETF struggling, approaching zero percent growth since January.

Mexico has the third highest interest rate in Latin America at 11%, only Colombia (11.75%) and Argentina (50%) or worse. Banxico did cut rates on March 21 by 25 basis points, but the May 9 monetary policy committee meeting is unlikely to cut rates now that inflation is rising again.

Banxico Deputy Governor Jonathan Heath said during the International Monetary Fund meetings in Washington DC in late April that he was "leaning toward a pause in May."  At the time of his comment, Mexico's 12-month rolling inflation as of mid-April was 4.63% versus 4.48% four weeks prior.

The Banxico survey, which was released on May 2, has inflation averaging 4.16% this year, the highest estimate in seven months.  

"I don't like Mexico right now. It's been dead money since December and I think we have reached the second stage of the slowdown in the U.S. And that's not good for Mexico," said Vladimir Signorelli, founder of Bretton Woods Research, a macro investment forecasting firm in New Jersey.

Investors in Latin America have been better off where the cost of capital is lowest. In this case, it's the iShares MSCI Peru . Rates there are 6%. The EPU ETF is outperforming Mexico and Brazil, up 40.8% in six months and 22% year-to-date. But that's a "glorified mining play, anyway," said Signorelli.

Mexico's manufacturing index is showing signs of sluggishness now. It fell to 49.2 in April from the revised 51.7 in March, according to the Mexican Institute of Finance Executives IMEF. Anything under 50 signifies a slowdown.

The June 2 elections are unlikely to be turbulent. The hand-picked successor of current president Andres Manuel Lopez Obrador, aka AMLO, is the likely winner: Claudia Sheinbaum polls at around 59% of the vote. She has the backing of AMLO's Morena party. Senator Xóchitl Gálvez is in second with around 36%.  

Mexico To Benefit From China 'De-Risking'

Mexico is the big winner of the geopolitical strife between the U.S. and China.

China's exports to Mexico rose nearly 60% in January, according to global freight rate intelligence platform Xeneta. "This is probably the strongest growing trade in the world right now," Xeneta chief analyst Peter Sand wrote on March 14.

Four hours from Laredo, Texas, in Nuevo Leon, Mexico, nearly $7 billion in investments have been made by American companies like Tesla . Chinese multinationals are building the Hofusan Industrial Park there.

And a recent study by Michigan CFO Associates showed U.S. businesses were curious about setting up shop in Mexico. The search term "manufacturing in Mexico" surged 250% between 2019 and April 2024.

This is a glimpse into the future.

The EWW ETF isn't cheap. It trades at 13.6x earnings and has a dividend yield of 2.15%. The Mexico Fund ( MXF ) is a closed-end fund alternative that trades at 8.74x and has a dividend yield of 4.84%.

By comparison, the EWZ ETF trades at just 5.78x and has a dividend yield of 6.10%. Peru, meanwhile, is the most expensive at 13.8x and a 3.68% dividend yield.