Why Did Mexico's Stocks Soar in 2009?

Analysts spent a lot of ink and pixels on the strong recovery of the U.S. stock market last year after it bottomed out that spring. But this remarkable rebound was actually trumped by our neighbor to the south. Mexico's IPC Index (more or less their version of the Dow Jones) rose 44 percent in 2009 and came within a whisper of its 2007 all-time high. This jump is very unusual, despite the global recovery in equities markets. And analysts are upbeat about its prospects for 2010, too. So what explains this Mexican wave?

One factor is that the IPC index had farther to climb after global markets tanked in 2008. Mexico fell harder and faster because of its close ties to the United States. Some analysts initially thought that emerging markets were shielded from the developed world's financial crisis"�but Mexico's export-based economy was too tethered to America for any investor optimism. Another problem was the plummeting price of oil, which is a major source of income for the Mexican government: The dip last year hampered the nation's ability to spend its way out of the crisis. With this as a backdrop, 2009 didn't look like Mexico's year"�and like the United States, its market dropped to a trough that March.

So what changed? After fleeing the market en masse in late 2008 and early 2009, investors regained their appetite for risk when they realized that the United States hadn't entirely fallen down a rabbit hole. In addition, oil prices picked up, finishing 2009 at around $75 per barrel. This gave the Mexican government ammunition for its own stimulus programs. And while some investors saw a state on the brink following the outbreak of swine flu and sensationalistic headlines on drug-trafficking violence, more saw a chance to regain lost ground in a quickly-recovering market. This confidence increased after the swine-flu hysteria died down and the drug violence proved to have little impact on the country's economy outside of those border areas.

The resilience of emerging markets also helped. As early as last May, reports like this one from Goldman Sachs (GS) highlighted the sharp recovery in the so-called BRIC (Brazil, Russia, China, and India) sector. This worked for the IPC in a couple of ways. While most of the companies on that index are domestic, a few of the larger players"â?such as wireless giant América Móvil"â?have exposure throughout Latin America, especially in high-flying Brazil. Just as the recovery in U.S. equities affected its southern neighbor, so too did Mexico share in the good fortunes of South America's largest economy.

The value of the peso"�especially in relation to the U.S. greenback"�also played a role. The Mexican currency has regained some of the ground it lost when the financial crisis hit, while the dollar has continued its steady slide after rising briefly when panicked investors piled into Treasuries in late 2008. Since many Mexican corporations hold their debt in dollars, the relative strength of the peso whittled down those obligations.

But the robust peso could prove to be a double-edged sword, especially if the dollar stays weak. Mexico depends on the United States to buy its goods and oil"�and for those exports to be attractive, they need to be cheap.

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