ANDBANK RESEARCH
Global Economics &
Markets
Alex Fusté
Chief Economist
[email protected]
+376 881 248
Working paper - 39
Bubbles in Mexico?
February, 2013
Corporate Review
There are signs that the Mexican Economy is suffering from
weaker demand from the US
10
Economic Activity Indicator - Mexico
10
5
5
0
0
-5
-5
-10
'98 '99 '00 '01 '02
'03 '04 '05 '06 '07
'08 '09 '10 '11 '12
-10
(MOV 3M , % 1YR) Economic Activity Indicator, Total, Sa, 2003=100, Index - Mexico
INEGI
©FactSet Research Systems
2
Corporate Review
Being the industrial production the most affected
64
Mex Industrial Production & US ISM Manuf Index
10
60
56
5
52
0
48
44
-5
40
-10
36
32
'98
'99
'00
'01
'02
'03
'04
'05
'06
'07
'08
'09
'10
'11
'12
-15
(MOV 3M , % 1YR) IP, Total, Sa (Right)
INEGI
©FactSet Research Systems
3
Corporate Review
But, despite the slowdown seen in the economy during the
second half of 2012 … markets have made a 23% rally in
the period
240
220
200
180
160
140
120
100
80
Equity Market - Mexico
180
160
140
120
100
Q2-10
Q4-10
Q2-11
Q4-11
Q2-12
Q4-12
80
(INDEX) MSCI Mexico - Total Return Index (Right)
(INDEX) MSCI Mexico Large Cap - Total Return Index (Left)
(INDEX) MSCI Mexico Mid Cap - Total Return Index (Left)
(INDEX) MSCI Mexico Small Cap - Total Return Index (Left)
MSCI
©FactSet Research System
4
Corporate Review
… at the same time, the peso has appreciated considerably
16
Exchange Rate - Mexico
16
15
15
14
+14% 14
13
13
12
Peso
strenghtens
vs USD
11
10
2008
2009
2010
2011
2012
12
11
10
FX Rate - Spot Mid - Mexican Peso per US Dollar
WM Reuters, Factset
©FactSet Research Systems
5
6
Corporate Review
All this suggest that Mexican assets could have overheated
(lower economic dynamics & higher asset prices) but …
… There are two aspects by which market performance could
be justified.
The first one … is a
recently sudden upturn in
US ISM indicators.
One factor that could
have been anticipated by
market participants, who
may have considered that
recent improvement in
US data will prove to be a
key driver for the
economic activity in
Mexico …
… suggesting that recent
economic downturn was a
short term nature one.
64
Mex Industrial Production & US ISM Manuf Index
10
60
56
5
52
0
48
44
-5
40
-10
36
32
'98
'99
'00
'01
'02
'03
'04
'05
'06
'07
'08
'09
'10
'11
'12
(MOV 3M , % 1YR) IP, Total, Sa (Right)
Ism (Napm) Manufacturing, Purchasing Managers Index - United States (Left)
-15
Corporate Review
… there are still two aspects by which market performance
could be justified.
The second one …
is a rebound seen in
agricultural output,
that together with a
resilient service
sector, could prove to
be a useful cushion for
the slowdown in
manufacturing
activity.
Source: Capital Economics
7
Corporate Review
However, this second factor (a rebound in agricultural
output) can not be seen as a source of growth that could
offset the lack of dynamism in the manufacturing activity
35
Basically, because
although agricultural
output could grow at
a double digit pace,
it still represents a
small portion of the
Mexican Exports
Exports - Mexico - By product (Monthly)
30
25
20
15
10
5
0
'98
'99
'00
'01
'02
'03
'04
'05
'06
'07
'08
'09
'10
'11
'12
Exports, FOB, Absolute values, Total, bn USD - Mexico
Exports, FOB, Absolute values, Manufacturing, bn USD - Mexico
Exports, FOB, Absolute values, Oil, Crude Oil, bn USD - Mexico
Exports, FOB, Absolute values, Agricultural, bn USD - Mexico
Bank of Mexico
©FactSet Research Systems
8
Corporate Review
Nevertheless, recent rally in Mexican Equities could have been
due to a previous very cheap valuation, so that, despite the
rally, the Mexican equity market would not show among the
most expensive
But our valuation table shows how, according to several valuation
criteria, Mexican equities are among the most expensive in the world …
The hierarchy value of each ratio for each market results from
comparing the current value of that ratio for a specific market
against its own history and from a cross-comparison against the
value in the other markets. The multiples use 12 month trailing EPS.
9
Corporate Review
Conclusions
¾ By all the aforementioned, one could conclude that financial
markets are overbought in Mexico (both equities and currency)
¾ So we recommend reduce exposure to these markets…
¾ … especially in equities (since our outlook for the currency is not
for a depreciation vs the usd, but the potential appreciation
should be now very limited)
10
Corporate Review
11
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Source: Capital Economics