Consumer confidence surveys are widely used to gauge the health of the consumer sector. This is especially important in consumer driven economies such as the United States and Mexico. The surveys aim to quantify the consumer sentiment by asking questions comparing the current state of the economy vs. a year before and their expectations of the state of the economy a year into the future. Answers are assigned a score that is then compared versus the answers from the previous period. The index is then adjusted based on this comparison.
In Mexico, the Mexican Institute for Statistics and Geography (INEGI) along with the Mexican Central Bank (Banxico) publishes several surveys, including a consumer confidence survey. Aside from measuring the consumer’s perception of the current state of the economy and the expectation about it 12 months ahead, the survey also asks about potential durable goods purchases, such as furniture, televisions, washing machines, or other electric appliances. This last question is an important gauge of durable goods demand. This survey is a key data point for investors in iShares MSCI Mexico Index Fund (EWW) or the locally traded iShares NAFTRAC (MEX:NAFTRAC).
On October 4, 2012, the INEGI released the latest consumer confidence index. In the graph above, the top line shows the index, while the line below it shows the individual question on durable goods. The absolute values are not important as they are relative to a base year (2003=100), but the trend of each line is what delivers the key message. In this case, consumer confidence has been falling since June and the intention to buy durable goods is close to a year low.
The data is a negative for EWW and MEX:NAFTRAC as it shows that consumer confidence is dropping and that demand for durable goods may be reduced. Other Latam ETF investors should bear in mind that Mexican stocks also account for roughly 25% of the holdings in iShares S&P Latin America 40 Index ETF (ILF) and SPDR S&P Emerging Latin America ETF (GML). Investors should understand though, that consumer confidence indices are lagging indicators; they indicate what has happened and at best if it can be expected to continue. In some cases, very high consumer confidence may drive spending that may speed up recovery or soften the blow of a recession; the opposite is also true, very low confidence may curve spending and worsen the economic situation. The consumer confidence index is therefore best utilized to analyze investment decisions in conjunction with other economic indicators, ideally leading indicators that can predict where the economy may be headed.
© 2013 Market Realist, Inc.