Mexican cyclical indicators pointing towards bounce
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The January reading of the Mexican leading cyclical indicator points to a recovery in the short term.
The cyclical indicators published by the Mexican Institute for Statistics and Geography (INEGI) are two indices, one coincident and one leading, which measure the current and expected performance of the Mexican economy.
The indices are based at 100, which represents the long term tendency of the economy. Values above 100 imply growth and below 100 imply contraction. By looking at the recent months trend and the position relative to the 100 mark, investors can interpret the phase within the economic cycle for each index:
Expansion: index above 100 and with increasing trend
Deceleration: index above 100 and with decreasing trend
Recession: index below 100 and with decreasing trend
Recovery: index below 100 and with increasing trend
The coincident indicator is composed of several macroeconomic factors, including economic activity indicator, industrial activity indicator, net retail sales, number of workers insured by social security, unemployment rate and total imports. The leading indicator is composed of manufacturing employment trends, non-oil exports, Mexican Bolsa1 market index, real exchange rate2, equilibrium interbank rate and S&P 500 index level. The resulting indices are a very convenient summary for investors that gives a clear view of the current and expected conditions in the market.
The December 2012 coincident indicator posted a value 100.2, which is 0.12 lower than the previous level, placing the indicator in the deceleration phase. The leading indicator for December showed an increase of 0.09 to reach 100.2, predicting an expansion phase. The preliminary January leading indicator points to a further increase of 0.08, which confirms the expansion phase theory.
It is important, though, to point out that to statistically confirm a turning point in the economy, the previous phase must have lasted at least nine months. The previous recovery cycle started in March 2009 and lasted until last Fall. The current deceleration may just be a hiccup since it has less than six months. Additionally, the leading indicator is staying above 100 and failing to confirm the deceleration.
In the past the leading indicator has reached turning points anywhere from 1 to 11 months before the coincident indicator, or 6 months on average. If the leading indicator maintains its course, then good news may lie ahead for the Mexican economy. Investors in Mexican equities (e.g. EWW, MXF) or Latam ETFs with a large Mexican exposure (e.g. ILF, GML) may see this as a medium term positive signal. In the short term, though, the Mexican stock market is trading at relatively rich valuations versus other emerging markets, so it may not be a good short term bet.