With little more than a week before the United States
presidential election campaign concludes many of the US's trading
partners are anxious to learn of the country's fate in light of the
looming fiscal cliff. Three and a half years into a recovery
from the greatest financial calamity since the great depression the
more US co-dependent emerging markets are hanging by their fingers
[caption id="attachment_71883" align="alignright" width="220"
caption="Mexico City skyline, with the tallest building to the left
the Torre PEMEX, the second tallest building in the city. The
triangular building is the Mexican Stock Market."]
America's neighbor to the south, Mexico, is perhaps the most
immediately affected by United States but it has also been one of
the better performing emerging markets of recent years. Cited
last week in Foreign Policy online as one of the five best
performing emerging markets the outlook for 2013 is questionable
and heavily influenced by what happens in the US.
If the US fails to effectively address the fiscal cliff the
Mexican economy is likely to be one of the first casualties.
This year, however, Mexico is expected to grow in the range
of 3.5-4% and is targeting 3.5% next year according to government
In an number of ways Mexico has been working to protect itself
from negative external influences: in terms of fiscal
consolidation, public debt management and catastrophic risk
assurance. Mexican markets have been assuming that the US was
going to address the fiscal cliff gradually not with what may prove
to be an abrupt resolution. Public debt management has been a
source of strength in Mexico as opposed to is being witnessed in
Europe and to what has been witnessed in Mexico in the past.
And while the Mexican central bank is considering raising rates
due to inflation this may change quickly with a reversal of
economic fortune thanks to the US mishandling the Fiscal Cliff.
A most likely scenario is that a falling US economy will drag
the Mexican economy down with it. And a falling US economy,
and US stock market, will likewise erase gains in Mexican equities.
The three year chart below shows the gains the iShares Mexico
Investable Market Index (
) has made recently.
Unfortunately that success has come with tightening of the
correlation between EWW, my proxy for Mexican equities, and the
SPDR S&P 500 Index Trust ETF (
), my proxy for US equities.
Finally the 12 month chart exhibits more of the same. Both
and their respective indexes have performed well since the market
bottom in March 2009 and during the recovery in the US economy.
However, as the "Cliff" approaches and as many question the
ability (or desire) for either political party to address it
properly the outlook for 2013 in the US has dimmed. Some
still forecast higher stock levels overall but many do not.
For investors in Mexican equities it will likely be the
Macro-view that matters most. A recession in the US and
declining stock markets will impact Mexico directly and in
sympathetic fashion. For the time being anyway investors must
look to the US for the future direction of Mexican stocks.