MEXICO HAS LONG

suffered from an image problem, especially in the eyes of U.S. investors. Illegal immigrants come from Mexico. Drugs come from Mexico. Intestinal parasites come from Mexico. After all, no Mexican vacation can begin without this familiar warning: Don't drink the water.

These negative perceptions don't inspire many Americans to head south of the border with their investment dollars. Beyond tequila and tacos, a "Made in Mexico" label isn't a strong selling point. By and large the country is seen as a source of cheap domestic help, not quality workmanship.

But as traders, we must be able to set aside all preconceived biases. Every idea must be evaluated on its own merits based on objective observation. In the case of Mexico, what matters isn't how bad the service was at the resort in Cancun, but how Mexican securities themselves are performing in both absolute and relative terms.

Given the negative attitudes harbored by many Americans about most things Mexican, it might come as a surprise that the Mexican economy, at least as evidenced by the performance of its financial markets, is even more attractive than that of the good ol' USA.

Mexican stocks, as tracked by the iShares MSCI Mexico Index ETF, are up almost 60% in the last two years, handily surpassing the single-digit gain for the S&P 500. Even in 2008, in which stocks world-wide have suffered massive losses, the Mexican market has held up, with the benchmark IPC index climbing 6% year to date, outpacing the S&P 500 by a cool 15 percentage points.

Run for the Border

Two-year performance EWW vs. S&P 500

Fundamentally, the country's progress is also evident. Rural poverty has decreased to below 27% from 42% in 2000. Mexico now boasts the 12th-largest economy in the world and has the highest rating of long-term sovereign credit in Latin America.

My interest, however, isn't in Mexican stocks, but its currency, which collapsed amid a monetary crisis in 1994 and, although recently stable, is among the few world currencies that hasn't posted strong gains against the greenback. The slumping U.S. dollar is referenced against the euro, the pound or even the Aussie dollar, but rarely the peso.

That might be changing. Amid a volatile environment for most securities, the peso has quietly marched up to a two-year high, having rallied to 10.5 pesos to the dollar last week from 11 pesos last fall.

Thanks to currency ETFs, the peso is as easily tradable as shares of Cisco Systems or General Electric. CurrencyShares Mexican Peso Trust, yields 6.67%, trades a mere 8,000 shares a day and holds less than $34 million in assets. Hard to see the herd running wild there.

Loco for Pesos

Two-year performance FXM

As the saying goes, there's always a bull market somewhere. But what interests me most about the Mexican peso isn't just the strong price action, but that reality coupled with the prevailing negativity and doubt surrounding the country in general.

Thanks to the scare tactics and fear mongering of the Minute Men and other anti-immigration groups, an understated xenophobia has now become an outright disgust. Mexico, or at least the Mexicans coming to America to live and work, are routinely blamed for everything from growing crime to a shrinking economy. For most investors, exchanging dollars for pesos requires a leap of faith few are willing to make.

Indeed, even in the face of strong price action, the prevailing attitude toward Mexico and its currency is doubt rather than hope. More often than not, those are exactly the types of opportunities that yield the fattest results.

Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC. At the time of writing, Hoenig's fund held positions in many of the securities mentioned.