Vertigo
Analyzing drawdowns and return performance for the Mexican stock market.
Recently, we stumbled upon a chart that visualized the percentage of years in which the S&P 500 experienced a drawdown of 5% or more during a calendar year.
In short, the chart showcased that since 1928 a whopping 96% of calendar years saw corrections of at least 5% for the global benchmark index, more than 60% saw drops of 10% or more, and 40% presented corrections that exceeded 15%.1
This piqued our curiosity, so we decided to replicate this analysis for the Mexican market.
Here’s what we found.
Just before we dive into the article, here’s a chart aiming to illustrate what a drawdown means using real data from the Mexican IPC for the year 2019.
If you look at the data below, you can see that the maximum drawdown is equivalent to the worst possible bet you could have made on a stock during a given period. In this case, a loss of 15.3%.
Turning back to the chart that inspired this post and benchmarking it against the Mexican flagship index we can see a similar pattern — albeit with a slight higher volatility for the IPC (or MEXBOL).
Drawdowns are completely natural in the stock market. However, the risk tolerance investors need to endure plays a key role in realizing returns whenever things get tough.
In the case of the Mexican index, maximum drawdowns have been greater than those of the S&P 500 in just over half of the years analyzed (2000 to 2024). During this period, the largest absolute difference between corrections for both indices occurred in the year 2000, when the IPC had a drawdown 19 percentage points deeper.
Conversely, the S&P 500's largest difference against the IPC during these years occurred in 2002, with an absolute difference just shy of 7 percentage points.
Despite boasting annualized returns of over 8% during the past 20 years, the Mexican IPC has struggled to present decent returns for investors in recent years. Underperforming the S&P in most comparable timeframes.
When adjusting for foreign exchange rates, the Mexican IPC’s lackluster performance becomes even more apparent, registering 20-year returns 3 percentage points lower than the S&P 500 (on a price-return basis).
To put this into perspective, a 3-point gap for an investment over a 20-year timeframe would result in a difference in total returns of more than 73%.
Going back to our drawdown analysis, how does this look from the perspective of individual stocks?
Let's start by comparing the four stocks with the highest traded value on the BMV over the past year: America Móvil, Wal-Mart México, Banorte, and CEMEX.
As expected, individual stocks exhibit more volatility than the Mexican benchmark index. However, some interesting results emerge when comparing these four companies.
Three of last year’s top traded stocks had +20% drawdowns in more than half of the timeframe covered; with WALMEX being the sole exception.
In the end, drawdowns are simply one of many metrics used to assess an investment’s financial risk. It's important to remember that these don’t necessarily represent the overall performance of an investment over time and should be interpreted individually when making financial decisions. As Investopedia notes:
While the extent of drawdowns is a factor in determining risk, so is the time it takes to recover a drawdown. Not all investments act alike. Some recover quicker than others.
Therefore, drawdowns should also be considered in the context of how long it has typically taken the investment or fund to recover the loss.
For reference, here’s the individual breakdown of “drawdown frequencies” per calendar year for the top 12 traded stocks in the BMV over the past 12 months (excluding the 4 companies we already presented).
Essentially, this means that almost every year since 1928 has experienced a drop of 5% or more from the index’s peak price during the calendar year. More than half of those years saw contractions of 10% or more from the year’s highest closing price, and so forth.
This implies that corrections in the stock market are completely natural. However, the risk tolerance of investors plays a key role in realizing returns whenever things get tough.