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Mexican August industrial production slows down

Mex Industrial Production AugustEnlarge GraphCoincident indicators are data points that serve to confirm the trends in the performance of an economy as predicted by leading indicators. Investors usually underestimate coincident indicators, but they are the best way to assess the predictive power of leading indicators. Production indicators are coincident indicators since they measure the current output performance of a given sector. The Industrial Production Index measures the volume output of the industrial sector of the economy, therefore a positive trend is observed when demand for industrial production is high. While the industrial output share of GDP varies by country, it is generally a significant share and therefore a healthy industrial sector is a good proxy for a healthy economy.

Investors in country 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), are best served paying close attention to such leading indicators to anticipate the direction of the country they are invested in. In Mexico, the Mexican Institute for Statistics and Geography (INEGI) publishes several leading indicators, including the Industrial Production Index, based on the physical volume of industrial production.

On October 12, 2012, the INEGI released the latest Industrial Production Index. While the actual numbers showed an increase, the seasonally adjusted index (shown above) reflected a slow down during August. Nonetheless, for almost a year, the Index has shown a pattern of two month increases followed by a month decrease. If indeed the industrial sector is just catching its breath, then the September figure, which will come out early November, should show an uptick once again.

While the decrease in August may be interpreted as negative, EWW investors should wait for the next data point before declaring a downtrend. Investors in other Latam ETFs such as iShares S&P Latin America 40 Index ETF (ILF) or SPDR S&P Emerging Latin America ETF (GML) should also take note, as their share of holdings in Mexican stocks is 27% and 23%, respectively.  It is worth mentioning that most Mexican leading indicators for September have shown signs of a slowdown, hence it is difficult to disregard the September decrease as just a pattern.

 

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