America Movil's (AMX) financial management and market positioning surely contribute to its stock performance, but equally important is the relationship between the Mexican peso and the U.S. dollar. Of all the major Mexican ADRs, America Movil, and the iShares Mexico ETF EWW most closely mirror the USDMXN currency pair, which a simple 5 year chart makes rather clear [Cemex (CX) and Homex (HXM) are of course in far worse shape due in part to their concentration in real estate):
In addition to the clear correlation of both America Movil and EWW to the peso, the more significant takeaway from this chart is that both securities underperform peso weakness to a much greater extent than they outperform peso strength. Given this apparent reality, examining the peso's behavior should provide some indication of what to expect for both and going forward.
Mexico has come a long way since the less-than-stable reputation it suffered in previous decades and evidence of its status as an investment grade economy is everywhere: low inflation, manageable debt, burgeoning central bank reserves, and most recently, a successful placement of a $1 billion Samurai bond issue in the Japanese market.
Unfortunately, lost in Mexico's rosy outlook is the fact that with greater openness comes greater vulnerability to external factors. This is most evident when we look at how the peso's relationship with the US dollar changes according to where the EURUSD FXE currency pair trades:
Conventional wisdom would have us believe that given Mexico's escalating economic integration with the U.S. over the past two decades, its investment opportunities should therefore provide some derivative form of safe haven when global capital flows transition into "risk-off" mode. This may be a reality in specific investment opportunities, but on a macro level it clearly does not apply to the value of the Mexican peso, or the above chart would not have the peso declining against the dollar whenever the dollar strengthens against the euro and vice versa. The difference is even more pronounced when we chart these two currency pairs in terms of rolling 8-week percentage changes:
It is hardly a coincidence that the widest divergences between these two currency pairs over the past five years have occurred in parallel with global events directly tied to the U.S. subprime crisis, eurozone debt management unease, or both. And at every flashpoint, without exception, the peso's value against the dollar goes in exactly the opposite direction as the dollar's value against the euro.
Past performance is not always a guarantee of future results, but in the case of the MXN-USD-EUR relationship, one would be hard-pressed to believe that the fundamental drivers of risk aversion will change overnight.
Put more bluntly: as the euro goes, so goes the peso, America Movil and the iShares Mexico ETF .