Things had finally started to look up for Mexico following a steep economic contraction in the fourth quarter of 2008 (GDP down -10.3%) and the first quarter of 2009 (-12%) and an increasingly violent drug war.  President Obama’s visit to Mexico City signaled increased American support in the battle with the drug gangs and, more generally, a higher profile for Mexico in US foreign and commercial policies. Also, the increasing signs of a nascent recovery in the US economy have very positive implications for the closely tied Mexican economy.  The IMF will be helping backstop the Mexican economy with a Flexible Credit Line (FCL).

International investors had started returning to the Mexican market.  The iShares MSCI Mexico Investible Market Fund ETF, eww, shot up by 50.7% between March 9 and April 24.

The outbreak of the swine flu virus has changed Mexico’s prospects dramatically.  The tourism industry, already hit severely by the high level of violence in some regions, will be crushed.  With the country at the epicenter of this global health alert, Mexico’s ability to carry out international business will likely be constrained.  Should the flu spread widely within the country, commercial activity in all sectors could be seriously affected.  It is too early to judge whether efforts by authorities to contain the spread of the disease will be effective.  The risk of a more prolonged recession has suddenly become high.

At Cumberland, we have reversed a recently added small Mexico position in our emerging market portfolios. We now hold no Mexico-specific securities in our managed accounts.