Mexico pullback would be predicated on impending decline in factory inventories

Patrick Fearon, a portfolio manager with Phoenix-based and Mexico-focused private equity firm TNV Mangement, hints at just how correlated Mexico’s export-led recovery is to U.S. inventories which, per the latest reading, may be due to begin a downtrend barring an unforeseen demand rash: the [business] inventory-to-sales-ratio, which measures how long it would take to clear shelves at the current sales pace, was 1.26 months in August, the highest since a matching ratio in February 2010.

“The third straight decline in the leading index is a negative sign for the Mexican economy, although more recent data suggest the index may be pointing more toward a slowdown in the economic recovery than an outright decline in activity.  Not only did the country post an extraordinarily strong growth rate in second-quarter GDP (up 7.6% year-over-year), but figures for July showed a rebound in international trade and lower unemployment, while figures for August showed a  rise in consumer confidence.  Nevertheless, the Mexican economic recovery is fragile.  To date, the recovery has stemmed primarily from increased exports, which have boosted industrial activity and spurred hiring.  Even more disturbing, data suggest that almost 40% of the increase in Mexican exports in the first half of 2010 came solely from trucks, autos, and auto parts.  This is not a very broad base on which to build a lasting economic recovery.  To reiterate what has already been said frequently on this blog:  If U.S. inventory rebuilding continues to slow and corporate and consumer demand north of the border do not soon accelerate, Mexico’s exports could peter out before other sectors of the economy are growing fast enough to take up the slack.” 

From a relatively passive standpoint the iShares Mexico ETF (EWW) remains a prudent and cheap way to get exposure, though its chart pattern of higher lows since this spring does not necessarily inspire immediate confidence.  That said, during that period it’s shown fairly strong resistance (high volume) on several occasions above the $45 level, and similar to Colombia’s ETF, its astonishing percentage run-up since early 2009 is almost unparelled.