Mexican peso, ETFs slammed after ruling party's election win. Here's what's worrying investors.

By Isabel Wang

Mexico ETFs suffer worst day in over 4 years as investors fear Morena party's majority in Congress paves way for constitutional reforms

Exchange-traded funds that track Mexican equities suffered their biggest daily decline in over four years on Monday, after Claudia Sheinbaum's victory in Mexico's presidential election sparked investor concerns that her party's landslide win could lead to constitutional changes.

See: Mexico elects Claudia Sheinbaum as its first ever woman president

On Monday, the largest U.S.-traded, Mexico-focused fund - the iShares MSCI Mexico ETF EWW, which has more than $2 billion under management - slid 10.7% to book its largest daily percentage decrease since March 16, 2020. Meanwhile, the Franklin FTSE Mexico ETF FLMX was off 10%, also logging its worst day in over four years, according to Dow Jones Market Data.

The two funds, which traded at $57.93 and $28.78, respectively, on Monday afternoon, closed at their lowest levels since early November, according to Dow Jones Market Data.

The Mexican peso (USDMXN) was tumbling on Monday afternoon, weakening by over 4% to trade at 17.70 against the U.S. dollar in the worst daily showing for the currency since June 2020. The ICE U.S. Dollar Index DXY, a gauge of the greenback's strength against a basket of rivals that doesn't include peso, was down 0.5% to 104.12 on Monday afternoon, according to FactSet data.

Sheinbaum, the former mayor of Mexico City and the presidential candidate for the ruling Morena party, won a landslide victory in Sunday's election. The scale of the Morena party's gains in Congress took markets by surprise; Sheinbaum and her allies secured two-thirds of the seats in the lower house, and they are expected to replicate that success in the upper Senate.

Investors worry that the supermajority would give the Morena party the power to approve sweeping constitutional and legal reforms proposed by outgoing President Andres Manuel Lopez Obrador earlier this year. The initiatives could significantly alter the political landscape in Mexico, including measures to overhaul the judiciary, pensions, electoral law and energy-sector regulations.

"Both the lower and upper legislative houses showed increased majorities for Morena. That suggests the potential for constitutional amendments sought by AMLO [Andres Manuel Lopez Obrador] may be passed after his departure," analysts at Bespoke Investment Group said in a Monday note.

In 2023, Mexico-related funds were among the best-performing single-country ETFs after the Bank of Mexico, also known as Banxico, hinted at a potential interest-rate cut coming in early 2024 - a move that preceded other major central banks, including the Federal Reserve.

The Banxico, as expected, cut its policy rate by 25 basis points in March, marking the first rate reduction since the bank embarked on a tightening cycle in 2021.

The iShares MSCI Mexico ETF advanced over 37% in 2023, while the iShares Core S&P 500 ETF IVV was up more than 24% and the iShares MSCI India ETF INDA jumped nearly 17% in the same period, according to FactSet data.

"Latin America can be accredited with a first-mover advantage in terms of monetary tightening as it sought to tame inflation across the continent. This also meant it was the first to loosen and cut rates," said Varun Laijawalla, co-portfolio manager of emerging-markets equity strategy at Ninety One, an investment-management firm.

The monetary-policy outlook may leave the Mexican central bank with "growth levers to pull" should it need to, which should provide future tailwinds for equity markets, Laijawalla said in a Friday note - adding that his company's current weighting to Latin America is the largest it has been in more than four years.

See: India ETF jumps as stock-market investors await country's election results

In the U.S., the three benchmark stock indexes finished mostly higher on Monday after a weak ISM manufacturing index raised concerns about the strength of the economy.

The Dow Jones Industrial Average DJIA was down 115.29 points, or 0.3%, while the S&P 500 SPX finished up 0.1% and the Nasdaq Composite COMP rose 0.6%, according to FactSet data.

-Isabel Wang

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

06-03-24 1632ET

Copyright (c) 2024 Dow Jones & Company, Inc.