Mexican Equities Offer the Possibility of Diversification

The launch of CME Group’s E-Mini S&P BMV IPC Index futures offers an opportune moment to examine the state of the Mexican economy and how the country’s equity market relates to currency, bond and stock markets in the United States.

Since 2000, U.S. economic expansion has outpaced Mexican growth with real GDP expanding 71% versus 49%, respectively (Figure 1).  Most of the disparity in growth emerged after 2017.

Figure 1: U.S. real GDP expanded 71% since 2000 while Mexico is up 49%Source: Bloomberg Professional (MXGPQTR and GDP CHWG), CME Economic Research Calculations

Comparing the performance of their equity markets is tricky. What makes the comparison challenging is that one can view the relative performance of U.S. and Mexican equities from  different perspectives:

Local currency returns Returns in the same currency (USD for example)

From a local currency return perspective, Mexico’s S&P BMV IPC Index has outperformed by a wide margin (Figure 2), but this ignores the fact that the Mexican peso (MXN) has declined by roughly 50% since 2000 (Figure 3).

Figure 2: In local currency terms Mexican equities have outperformed U.S. stocksSource: Bloomberg Professional (MEXBOL (TRA), SPXT, XNDX, RUTTR), CME Economic Research Calculations

Figure 3: The peso has lost half its value against USD since the turn of the centurySource: Bloomberg Professional (MXNUSD)

When converted into the same currency, the overall returns since the year 2000 have been very similar, but the timing of the returns has been very different, with Mexico’s S&P BMV IPC Index outperforming from 2000 to 2012 while U.S. equity indices outperformed from 2012 onwards (Figure 4). This hints at the diversification potential of investing in Mexican equities alongside a portfolio of U.S. stocks.

Figure 4: In USD, Mexican and US stocks have delivered similar performance since 2000Source: Bloomberg Professional (MEXBOL Converted with MXNUSD, SPXT, XNDX, RUTTR), CME Economic Research Calculations

Indeed, the correlation between Mexican and U.S. equities, while occasionally as high as +0.8 from 2007 to 2012, has been ranging from +0.2 to +0.6 on a one-year rolling basis for the past dozen years (Figure 6). Part of this may be a reflection of the fact that Mexico’s underlying sector composition is very different from U.S. indices (Table 1).

Table 1: Mexico’s S&P BMV IPC has vastly different sector weighting than the S&P 500

Sector S&P BMV IPC S&P 500 Consumer Staples 29.92% 5.21% Materials 23.95% 1.89% Financials 17.64% 13.97% Industrials 14.51% 8.46% Communications Services 10.44% 10.01% Real Estate 1.53% 2.00% Consumer Discretionary 1.49% 10.54% Health Care 0.53% 9.08% Information Technology 0% 33.44% Energy 0% 3.03% Utilties 0% 2.36%

Source: Bloomerg Professional IMAP

Mexico has a much higher weighting to consumer staples and materials stocks, a much lower weighting to consumer discretionary and no weighting at all to information technology stocks – the S&P 500’s biggest sector – or to energy or utility stocks. Despite the S&P BMV IPC Index’s high weighting to consumer staples and materials stocks, its correlation with the S&P 500 sectors has not been particularly high during the past year either (Figure 6), suggesting strong diversification potential from S&P 500 E-Mini Select Sector Futures as well.

Story Continues

Figure 5: Mexico’s S&P BMV IPC’s correlation with U.S. equities has weakened since 2016Source: Bloomberg Professional (IS1, ES1, NQ1, RTY1 (RTY pre-2015)), CME Economic Research Calculations

Figure 6: S&P BMV IPC has not displayed strong correlations with U.S. sectorsSource: Bloomberg Professional (IS1, S5MATR, S5INDU, S5INFT, S5FINL, S5ENRS, S5TELS, S5COND, S5HLTH, S5RLSR, S5CONS, S5UTIL) CME Economic Research Calculations

Investors tend to see MXN itself as a risk asset. When equities are going higher, MXN often rises versus USD. However, MXN tends to be somewhat more highly correlated to the S&P 500 than to Mexico’s S&P BMV IPC Index. This suggests that a stronger peso tends to weigh somewhat on Mexico’s stocks as a stronger currency will make it more expensive for Americans to buy Mexico’s products (Figure 7). Indeed 72% of Mexico’s exports head to the U.S. (Figure 8).

Figure 7: Both Mexican and U.S. equities have a positive correlation to the pesoSource: Bloomberg Professional (IS1, ES1, PE1), CME Economic Research Calculations

Figure 8: 72% of Mexico’s exports head to the U.S.Source: The Observatory of Economix Complexity (OEC Mexico Country Profile 2024)

Mexico’s economy may be on a rather different trajectory than the U.S. in the years ahead.  Faced with higher tariffs, Mexico’s central bank has been actively cutting rates while the Fed has been on hold, narrowing the gap between the two countries’ central bank policy rates (Figure 9).

Figure 9: Mexico’s central bank has been steadily cutting rates this yearSource: Bloomberg Professional (BZSTSETA, CHOVCHOV, CORRRMIN, MXONBR, FDTRMID)

As is the case in the U.S. and many other countries, Mexico’s core inflation rate has begun to creep higher. That said, Mexico’s central bank appears to believe that U.S. tariffs will push Mexico’s inflation lower as Mexico potentially finds itself flooded with Chinese, European Korean, Japanese and even non-U.S.M.C.A. compliant Mexican goods once destined for the U.S.  (Figure 10).

Figure 10: Mexico’s core inflation rate has picked up slightlySource: Bloomberg Professional (MXONBR and MXCCYOY)

For the moment, Mexico’s unemployment rate remains at historically low levels at just above 2.5% (Figure 11). This is a contrast to the U.S. where unemployment rates hit bottom in 2023 and have begun to rise slightly (Figure 12).

Figure 11: Mexico’s unemployment rate is near record lowsSource: Bloomberg Professional (MXONBR and MXUEUNSA)

Figure 12: U.S. unemployment has been moving slightly higherSource: Bloomberg Professional (USURTOT and USUDMAER)

Perhaps the most striking differences between the U.S. and Mexican economies are in the realm of debt. U.S. debt to GDP ratios across the public and private sectors add up to 250% of GDP, including a public debt of over 100% of GDP (Figure 13). This contrasts very sharply with Mexico, whose total debt comes to just 81% of GDP, of which public debt is 43.6% of annual national output (Figure 14).

Figure 13: The U.S. has rather high levels of public and private sector debtSource: Bank For Intenational Settlements, Total Credit to the Non-Financial Sector Database (Q:US:G:A:M:770:A, Q:US:H:A:M::770:A, Q:US:N:A:M:770:A)

Figure 14: Mexico’s debt levels are relatively lowSource: Bank For Intenational Settlements, Total Credit to the Non-Financial Sector Database (Q:MX:G:A:N:770:A, Q:MX:H:A:M::770:A, Q:MX:N:A:M:770:A)

Finally, there is the issue of valuations. Mexico’s S&P/BMV IPC Index trades at 13.96x trailing earnings compared to 24.66x for the S&P 500 and 33.32x for the Nasdaq 100. This reflects in part the different sector makeup of the indices, with the U.S. averages more heavily weighted towards tech stocks, which typically command higher earnings multiples. It also reflects differing levels of interest rates, with Mexican 10Y swaps at 7.9% while their U.S. equivalents are trading at half that level around 3.69%.

All these factors suggest that Mexican and U.S. equities could remain on different trajectories in the years ahead and that Mexican stocks could offer an interesting diversification opportunity to capital allocated to the U.S. market.

All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.

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All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.

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