Mexico’s fiesta: winding down?

While many markets have slid in 2008, Mexico's has outperformed. The benchmark IPC index is up by over 6% this year, and has gained 10% in dollar terms.

This is partly due to the market catching up with other emerging markets after a weak performance last year, while recent economic data have been better than expected. Pension funds will now be permitted to double their investments in the equity market to 30% of funds under management.

Still, this fiesta "could yet slow to a shuffle" as economic realities reassert themselves, as Lex points out in the FT. The market is vulnerable to a slide in commodity prices, while 80% of Mexico's exports, which in turn represent about 30% of GDP, go to the US, according to Citigroup.

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Mexico is the emerging market most exposed to the US and "we would be surprised" if Mexico's market kept performing so strongly "just as US economic data starts to deteriorate", says Morgan Stanley, which points out that the market remains closely correlated with the S&P 500; the latter explains 65% of the MSCI Mexico index's performance.

What's more, the market is on a forward p/e of 14.5, a hefty premium to emerging markets in general. The market's recent outperformance "is not a trend".