Why Has the Dow Crushed Mexico's Stock Market Lately?

The Dow Jones Industrials (DJINDICES: ^DJI  ) demonstrated the strength of the bull market on Monday, recovering from initial losses of more than 100 points to trade just under breakeven as of 12:30 p.m. EDT. Elsewhere around the world, concerns about global economic growth have had a mixed impact on international stock markets. As Mexico celebrates its Cinco de Mayo holiday, let's look at the U.S.' neighbor to the south and how its stock market has fared compared to the Dow Jones Industrials.

Why Mexico has struggled recently
Throughout the past decade, the Mexican stock market has absolutely crushed the Dow Jones, as you can see below:

^DJI Chart

^DJI data by YCharts.

The performance of the Mexican stock market in local-currency terms is largely tracked by the Mexico-IPC line above. The iShares MSCI Mexico ETF (NYSEMKT: EWW  ) , on the other hand, is dollar-denominated and therefore reflects changes in the relative value of the U.S. dollar compared to the Mexican peso.

The strong returns from Mexican stocks reflect the opportunities that the country's businesses have had and how they've taken advantage of those opportunities. On one hand, Mexico stands ready to meet the needs of a growing Latin American consumer class with strong production capabilities at relatively low cost. On the other hand, Mexico has a strategic advantage over rivals like Brazil in lucrative trade with the U.S. and Canada, thanks to the North American Free Trade Agreement. Moreover, its shared border with the U.S. has created convenient opportunities for U.S. companies to benefit from Mexican production facilities to reduce costs and boost margins, including companies in the Dow Jones Industrials.

But more recently, Mexico has fallen out of favor:

^DJI Chart

^DJI data by YCharts.

Many analysts have blamed the Federal Reserve's pullback of its quantitative easing program for the underperformance of Mexico and other emerging-economy stock markets compared to the Dow Jones Industrials. As downward pressure on bond rates from the Fed's actions dissipates, many see the U.S. stock market as having more attractive growth prospects, and that has led to a general drop in emerging-market interest in Mexico and around the world.

Yet the drop isn't uniform across the Mexican stock market. As you can see below, some stocks are performing better than others:

CX Chart

CX data by YCharts.

You can see the general trend here. Cemex (NYSE: CX  ) represents how well companies that do business not just domestically but also in the U.S. and other developed-market nations have taken advantage of better conditions in the U.S. economy. As construction activity rises, Cemex benefits from selling more cement into the United States.

Conversely, companies that are focused on domestic or purely Latin American operations haven't done as well. Beverage companies have performed badly as they suffered from the same trends that have hurt their U.S. counterparts. Meanwhile, telecom giant America Movil (NYSE: AMX  ) has seen greater competition in the Latin American telecom market weigh on its future prospects, pushing investors toward safer areas.

Still, despite its recent slump, Mexico has plenty of long-term opportunities to capitalize on. If it can sustain the positive momentum it has built up over the past decade, then Mexico could give investors a great chance to get into the country's stock market on the cheap, and its market could produce greater returns than the Dow Jones Industrials.

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