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Manufacturing orders in Mexico signal potential recession

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Manufacturing orders in Mexico signal potential recession PART 1 OF 1

Manufacturing orders in Mexico signal potential recession

Manufacturing orders in Mexico signal potential recession

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The Mexican IPM (index of manufacturing orders) is equivalent to the ISM index in the US and carries a similar weight in terms of investor attention. The index is compiled by the Mexican Institute for Statistics and Geography (INEGI) and follows the same format as the American version, surveying whether several factors are increasing, decreasing or are unchanged. Among the factors tested are: orders, production, employment and inventories.

The index is a valuable gauge of how the demand for manufacturing products is evolving, which serves as a leading indicator of the economy’s performance. The index ranges from 0 to 100, with values above 50 implying expansion of the economy and contraction for values below 50. 

The graph above shows the seasonally adjusted version of the IPM as of October 2012. The October data point shows a strong reversal of the spike in September and implies a return to the slightly negative trend started in June. Given the IPM is a key leading economic indicator, investors have taken the decline negatively and several analysts have lowered their investment allocation to Mexico. Nonetheless, the current value is in line with the 12 month average.

Investors in Mexican ETFs, such as  iShares MSCI Mexico Index Fund (EWW), ProShares Ultra MSCI Mexico Investable Market ETF (UMX) or the locally traded iShares NAFTRAC (MEX:NAFTRAC), may find it useful to closely monitor the evolution of the IPM index to gauge the performance of the Mexican economy. Despite the decline in October, overall the index has moved erratically throughout the last year, bouncing between 51 and 54, mainly due to the fiscal cliff and election concerns in the US.

The next IPM, showing the November data point, will come out on December 4, 2012. For investors in EWW, UMX or MEX:NAFTRAC, next month’s value will determine whether or not September was an anomaly and the economy is indeed slowing down. If a recession in Mexico is triggered by a slowdown in the US, then perhaps considering a short Mexican ETF, such as ProShares UltraShort MSCI Mexico Investable Market Index Fund (SMK), may be reasonable.

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