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After a deep contraction, Mexico’s economy, along with its related ETF, may have no where left to look to but up. Nevertheless, the economy has a couple of snags to overcome.

Mexico’s economy, Latin America’s second largest, contracted 10.3% in the second quarter year-over-year, manufacturing declined 16.4% and the service industry shrank 10.4%, reports Jens Erik Gould for Bloomberg.

Mexico has been stuck in a lull and joblessness has increased as the recession in the United States, which takes in 80% of Mexico’s exports, greatly decreased demand for goods.

Economist Rogelio Ramierz de la O expects the Mexican peso will depreciate along with the shrinking economy. The Central Bank estimates the economy will shrink up to 7.5% this year. A battered economy translates into less tax revenue, and including falling oil revenue, will create a budget deficit of 3% of GDP this year.

The quarter-on-quarter drop of 1.12% in the second quarter comes to an annualized decline of 4.4%, which marked a great improvement from the previous quarter, report Nicholas Casey and Anthony Harrup for The Wall Street Journal. Alfredo Coutino, director for Latin America at Moody’s, thinks Mexico may step out of the recession by the end of the third quarter.

Why is its ETF doing so well? Thank Mexico’s robust telecom sector, in which the ETF has a 38% weighting. Forecasts for the sector in Latin America call for continuing strong demand and strong revenue growth throughout the continent.

  • iShares MSCI Mexico Investable Mkt Idx (NYSEARCA:EWW): up 38% year-to-date

ETF EWW

Max Chen contributed to this article.

Source: Why Mexico's ETF Is Doing So Well, Despite Glum Economy