Market Trends as
Political Indicators in Mexico
By Kenneth
Emmond
What are the markets telling us about Mexico’s
politics?
Financial markets are an imperfect but useful guide
to political analysis. They famously reflect the collective fear and greed of investors but are free of other emotional biases
that affect the reading of tea leaves by individual analysts.
For example, the steep rise in world petroleum prices
reflects more than the current supply-demand status. It also serves as a barometer of investor fears about supply uncertainties
caused by instability in important producing regions – the Middle East, West Africa, and Venezuela.
The rise or fall in the price of gold, still considered
by many as the currency of last resort, mirrors collective conclusions about prospects for a worldwide depression.
In Mexico the main financial bellwethers are the
Mexican Stock Exchange (BMV), the peso-dollar exchange rate, and the country risk index.
These indicators are not perfect: an exchange rate
movement might be a response to events in the United States, and June’s steep declines in the BMV index were part of
a worldwide downtrend in emerging markets.
However, at times like these, when uncertainty stalks
Mexico’s political landscape, it can be instructive to see how the markets respond.
Unlike many commentators, the markets have been sanguine
about the importune victory claims of presidential candidates, the weighty decision that’s before the electoral court,
and the emotionally charged gatherings in Mexico City’s main square, the Zocalo. They’re saying investors are
confident that Mexico will work its way through its post-election travails and things will return to normal in due course.
The roller-coaster market during the week following
the elections showed an unsurprising bias in favor of Felipe Calderon, the pro-business candidate of the National Action Party
(PAN). It rose and fell as the lead see-sawed between him and his main opponent, Andres Manuel Lopez Obrador, the candidate
for the Coalition for the Good of All, a three-party left-wing coalition dominated by the Party of the Democratic Revolution.
The markets are betting on a pro-Calderon decision
from the Federal Electoral Tribunal (TRIFE). They have remained calm or have actually strengthened in recent days.
The BMV price barometer, the Index of Prices and
Quotations (IPC), spent the last half of July moving in a narrow range, close to the all-time highs reached earlier this year.
On Friday, July 28, it closed at 20,252.33, up 3.75 percent for the week.
Last week the BMV reported that foreign participation
rose 2.44 percent during the first half of 2006, and stood at US$242.4 billion on June 30 – almost half of all the capital
invested in the market.
Money placed in listed stocks, unlike funds invested
directly in bricks and mortar, can be withdrawn literally overnight. However, the steady-as-she-goes performance of the BMV
tells us that the foreign money is sticking around.
The exchange rate is tracing a similar path. After
falling to a low of about 11.50 pesos per dollar in June, and an early July hiccup like the one on the BMV, the peso has strengthened,
closing July 27 at 10.90 to the dollar.
Country risk is a measurement of investors’
confidence that a country will not default on its bond issues. It’s based on the difference between interest rates on
a country’s dollar-denominated bonds and the benchmark rate accorded to U.S. Treasury Bills.
Mexico’s country risk rating rose to 152 basis
points shortly before the election, but since then it has moved back near its all-time lows. Last week it stood at 116, far
lower than those of other Latin American countries such as Brazil and Argentina. A basis point is 1/100th of a percent.
Mexico’s favorable country risk reflects the
stability of its main economic indicators in recent years, but its movements also show continuing confidence in the face of
uncertainties about the election outcome.
And so, whatever the analysis of chicken entrails
we columnists might produce, the markets are saying, “Don’t worry. It’s going to be OK.”
The markets are often right, but not always. If they’re
wrong, if the coming weeks bring political instability or, given their political prejudice, the prospect of a Lopez Obrador
presidency, expect a sharp correction in the direction of all three indicators.
Markets are not loyal. Their participants seek profits
and are not bothered by what might be “right” or “wrong.” Shorn of these values, they can come close
to providing an objective view of the political landscape.
Looked at in this way, they provide an imperfect
but helpful window on the future.
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Kenneth Emmond, an economist, market consultant and
journalist who has lived in Mexico since 1995, is also a columnist with MexiData.info.
He can be reached via e-mail at Kemmond00@yahoo.com.
