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Drug Cartels No Match for Mexican Investment Boom

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Mexico is now confronting its worst-ever drug violence.

John Bolton, noted diplomat and senior fellow at the American Enterprise Institute, writes this week that the country south of our border is actually starting to resemble Colombia 25 years ago.

Drug cartels are strengthening rapidly; Mexico’s governmental authority and legitimacy are weakening; and the Mexican people are deeply divided over how to respond to the cartels’ challenge to Mexico’s civil society.

The statistics alone are frightening, Bolton says:

“Reliable estimates put the number killed by drug-related violence in the past four years at 28,000. Fully 30 journalists and 11 mayors have been assassinated so far in 2010. Corruption in Mexico's police and judiciary, long a serious and insidious problem, is worsening. The cartels engage in open gun battles with the police and, among themselves, compete for territory and markets. In Ciudad Juarez, right on the border with El Paso, 102 police have died this year alone in drug-related violence.”

However, for all the tragic violence, drug criminals might have met their match.

Specifically, despite the headline-making bloodshed, there has been no stopping the Mexican investment boom thanks to NAFTA, according to a recent Bloomberg report, which emphasizes that the 16-year-old trade agreement continues to attract investors.

“The treaty signed with the U.S. and Canada caused overseas sales to quadruple. In the first seven months of this year, Mexico’s share of U.S. exports rose while China’s fell, according to the U.S. Commerce Department. Gross domestic product expanded 7.6 percent in the second quarter, the most since 1998, boosted by U.S. demand for everything from refrigerators to cars.”

“Investors poured $2 billion into Mexican equities in the 12 months to July, reversing a $470 million net withdrawal in the year-earlier period, according to EPFR Global, a research firm in Cambridge, Massachusetts.”

The IMF forecasts Mexico’s economy will expand 4.5% this year after shrinking 6.5% in 2009, the biggest rebound among the world’s largest nations after Russia.

“The Nafta agreement helped Mexico and provided support,” said Pimco’s Guillermo Osses, who helps oversee $50 billion in emerging-market assets. “The influence that the drug violence has on business isn’t that significant at this point.”

Stateside money managers are taking notice: New York based-Emerging Global Advisors just recently launched a new ETF offering exposure to consumers in fast-growing emerging markets. It’s called the Emerging Global Shares DJ Emerging Markets Consumer Titans ETF (ECON).

The country with the largest weighing in the fund? Mexico at 20%
POSITION:  No positions in stocks mentioned.