Checking Out Steamy Funds South of the Border

It's not so much countries as country. And that country is Mexico. iShares tracking the Mexican markets returned 37% in 2003.

Mexico makes up 34% of the MSCI Latin American index compared with Brazil's 48%. Coming in a distant show is Chile with close to 11%.

Mexico outperformed its powerful neighbor to the north last year -- the Dow and S&P 500 both returned about 25% -- though fund managers continue to see problems with Mexico going forward. Most will continue their slight underweighting of Mexico in Latin American funds in 2004 as well.

Andrew Clark, Lipper's senior research analyst, says the problem starts at the top: "President Fox is losing popularity, and it's causing a serious impact on confidence."

Landers agrees that Fox has not been as effective as his Brazilian counterpart Lula. "President Fox has been stifled in Congress, and the PRI is blocking him on everything. Mexico needs both electricity reform and fiscal reform."

From a global perspective, China's emergence has not been the boon to Mexico that it has been to Brazil. The American manufacturing jobs Mexico sucked south are now being sucked across the Pacific to China. Mexico, like the U.S., is trending toward a service-based economy. And as with the U.S. in the past few years, it is the Mexican consumer keeping the economy afloat.

When it comes to exports, Clark estimates that 70% of Mexico's exports come into the U.S. Thus, the health of Mexico's economy will continue to be coupled with the U.S. recovery in 2004.

The fate of Mexico's markets, however, is more a function of two communications stocks: Telefonos de Mexico(TMX Quote) and America Movil(AMX Quote), which make up 7.6% and 6.6%, respectively, of the MSCI Latin American index.

Landers says that real estate plays might be the best bet in Mexico in 2004 as Fox's government tries to increase the nation's homeownership.