Mexican industrial activity dropped significantly in December 2012. Industrial production is considered a coincident indicator, meaning that it changes with the economy as a whole and therefore provides information about the current state of the economy. Given that it is published with a lag of a little over a month, it serves mostly to identify and confirm trends and momentum in economic performance rather than to predict changes in the economy.
The values for December showed a very steep slow down versus seasonally-adjusted November values, dropping 2.1%. Comparing versus December 2011 the output also dropped, posting a 1.1% decrease. Nonetheless, the full year 2012 industrial output was 3.6% higher than in 2011, which is almost in line with the full year GDP growth of 3.9%.
The Mexican economy is very closely linked to the U.S. and at the end of last year the fiscal cliff worries may have caused businesses to reduce output foreseeing a drop in future demand. With the current grid-lock in the U.S. Congress, it seems likely that the budget sequester will go into effect in less than a week, which will reduce growth forecasts overall. Both the U.S. and Mexican stock market will likely be negatively affected.
Investors in Mexico focused ETFs, such as EWW or the locally traded NAFTRAC, as well as closed end funds such as MXF, should be aware of this and take the necessary measures to protect against the short term volatility coming up. Several other emerging market economies may also be affected by the U.S. fiscal policies, therefore investors in EEM and VWO should also stay abreast of the situation.