The exchange rate is one of the main economic indicators used by specialists to analyze the country's performance and the confidence that foreign investors have in it.
Throughout its history, Mexico has experienced difficult periods in which the value of its currency has been severely affected by internal factors (the December 1994 error) or external factors (the financial crisis in 2008). These relatively recent events generated great losses for the Mexican economy, reducing the well-being of the population in general and creating endless losses for companies in different industries.
What is happening in the Mexican economy today?
Today we are faced with a new risk initially caused by the effects of the COVID-19 pandemic and the difficulties experienced in trying to reactivate the economy: shortages, inflation, outbreaks, rising raw material prices, the Ukrainian War, etc.
During these periods of uncertainty, the Mexican peso reached its lowest level in history versus its North American counterpart, reaching 25,338 pesos per dollar on March 23, 2020. However, just 7 months later, the Mexican currency had already recovered its value and was, incredibly for many of us, below 20 pesos per dollar. These abrupt movements make planning in companies much more complex , especially when operations are carried out in currencies other than the peso.
The results of public companies in Mexico are subject to the country's economic conditions , which in turn are strongly reflected through the price of the Mexican peso in international markets. Although we recognize that the value of the peso against the dollar is not the only measure of economic well-being in Mexico, in this article we will use it as a key parameter to measure the performance of the stocks that make up the Price Index (IPC) of the Mexican Stock Exchange (BMV).
Taking into account a 5-year period (June 2017 – May 2022), a correlation was made between the price of the shares that make up the IPC and the exchange rate of the peso versus the dollar. The correlation measures the degree of inference that one variable has on another variable. What we are measuring in this case is how much the IPC shares were affected by movements in the peso . A correlation of 100% would mean that the peso and the share price behaved exactly the same while a negative correlation would exemplify shares in which the price increased when the peso depreciated.
A strengthening of the Mexican peso would reflect greater confidence of foreign investors in the country and therefore a higher return derived from obtaining more dollars when list of telegram users in laos realizing their profits. Because of this, it seems congruent that within the top 5 of companies that benefited from the strengthening of the peso are 2 Mexican financial institutions ( Banorte and BanBajío ) and the Mexican stock market in general (BMV) . Further analysis requires understanding why Liverpool and OMA are within this top 5, but the clearest relationship would be that a strengthening of the internal market (Mexican peso) generates greater purchasing power in the population that in turn generates spending on consumer goods and travel .
The only IPC stock in which we obtained a negative correlation was Gruma. This effect could be explained to a certain extent by the strong presence that the Company has in the United States and therefore a decrease in its income when the dollar depreciates . However, there are various other factors that affect the price of a share and in that sense a correlation close to zero was obtained, where there is no clear relationship between the share price and the peso.
Of the issuers with the lowest correlation with respect to the Mexican peso exchange rate (América Móvil, Coca-Cola and Genomma), it is worth mentioning that they have very sophisticated treasuries in which there is probably a hedging strategy that mitigates the fluctuation of the Mexican peso, avoiding affecting the Company's financial results and operating margins .
Without taking into account other correlation factors that exist with the Mexican peso, such as the country's economic growth , inflation, and government debt , the ideal scenario for companies would be that their correlation with the Mexican peso was close to zero and that, therefore, their results would depend solely on the daily operations of the business and its talent , but not on market factors such as the exchange rate, interest rates, and raw material prices that are beyond their control.
Regardless of the correlation that may exist between the peso's price and the price of shares within the BMV, it is important that treasuries generate financial risk management strategies that ensure that performance is little or not at all affected by factors external to daily operations. Below are the suggested steps for hedging planning .