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Drug violence doesn't scare off investors in Mexico, as stocks near all-time high

October 4, 2010 |  4:25 pm

Mexico’s horrific drug violence has been no impediment for its stock market: The country’s main share index is on the verge of hitting a record high.

The Mexican Stock Exchange’s IPC index rose Monday for a third consecutive session, gaining 232.69 points, or 0.7%, to end at 34,040.17.

That left it up 6% year to date and less than 0.3% below its all-time closing high of 34,134.23 reached April 15.

If the IPC can set a new record it would be among only a handful of equity market indexes worldwide that have done so this year, including those of Indonesia, Chile and Turkey.

Mexicanflag Most stock markets remain not only below their spring peaks but are well below their highs set before the global financial crash in 2008. The U.S. Standard & Poor’s 500 index, which lost 0.8% to 1,137.03 on Monday, is up 2% this year but still is 6.6% below its 2010 high reached on April 23 -- and 27.4% below its all-time high of 1,565.15 set on Oct. 9, 2007.

In a lengthy analysison Monday, Bloomberg News’ Tal Barak Harif and Jonathan J. Levin credited the 16-year-old North American Free Trade Agreement with continuing to bolster the Mexican economy and draw in foreign investment despite the scourge of drug violence.

From Bloomberg:

The North American Free Trade Agreement that took effect in 1994 continues to lure investors even as Mexico confronts its worst-ever drug violence. The treaty  signed with the U.S. and Canada caused overseas sales to quadruple. In the first seven months of this year, Mexico’s share of U.S. exports rose while China’s fell, according to the U.S. Commerce Department. Gross domestic product expanded 7.6% in the second quarter, the most since 1998, boosted by U.S. demand for everything from refrigerators to cars.

“Since 1995, the advantage that Mexico has as a partner with the U.S. in Nafta has been growing,” said Sergio Luna, the head economist at Citigroup Inc.’s Banamex unit in Mexico City.

“Drug-related violence in Mexico has increased, and even spilled over to areas in the country previously thought to be immune,” said Stefan Hofer, an emerging-markets equity strategist at Bank Julius Baer & Co. in Zurich, which oversees about $160 billion worldwide. “While the security situation is an important issue to watch, and has many tragic dimensions, international investors have not been dissuaded from investing in Mexico.”

In other words, multinational companies still see a competitive advantage in locating in Mexico despite the lethal risks posed by the drug lords.

Volkswagen last month said it would spend $550 million to build a car engine plant in central Mexico. Some of those engines will go into the mid-size sedan the company expects to produce at a plant in Chattanooga, Tenn.

The economy’s growth has fueled hefty gains this year in shares of companies including chemical producer Mexichem, up 43% since Jan. 1; financial services firm Banco Compartamos, up 30%; and mining firm Industrias Penoles, up 13%.

Mexico also is riding the wave of economic optimism that is buoying Latin American stock markets in general this year and the U.S.-based mutual funds that invest in them. The Chilean market is up 34%, Colombian stocks are up 29% and the Peruvian market is up 28%. But stocks in Brazil, the largest economy in the region, are lagging, up 2.6% this year.

With most Latin American currencies rising against the dollar over the last nine months, U.S. investors in the region also are reaping the benefit of currency gains. The dollar now is worth 12.6 Mexican pesos, down from 13.1 pesos at the start of the year. That means Mexican stocks are worth more when translated into dollars.

The Mexican IPC stock index is up 10% in dollar terms year to date compared with the 6% rise in peso terms. 

-- Tom Petruno

Image: The Mexican flag