1980s Mexican Currency Crisis and The Stock Market

I came across this in the July 2010 Bestinver investment letter

"Towards the end of the 1970s, Latin-America experienced a boom motivated by a fast growth

of the credit that streamed through North-American banks thanks to the surplus generated

by the OPEC. From 1980 onward, the petroleum price stopped rising and originated a credit

crisis. The various governments tried to interrupt it in a very similar way as how nowadays

the occidental countries are trying to do: through public deficit and by printing money. As a

consequence of these policies, the currency started to lose purchasing power. If we take the

situation in Mexico as an example: between 1979 and 1987, the currency lost 95% of its value

in reference to the dollar. In this situation... investment in real assets through the stock market turned out to be the best alternative.

At first, the currency depreciated more rapidly than the stock exchange. This is why the

Mexican market hit the bottom in dollar terms in 1983. Nevertheless, and after a period during

which the stock exchanged is dragged by the panic of the currency devaluation and the lack

of confidence in the system, the investor realizes that the companies continue working and

generating positive results (the society continues needing services and products to live) thanks

to their capacity of incorporating the new situation into their production process (moving the

new costs to their final prices and maintaining their capacity to generate added value intact).

This way, the Mexican market hit the roof soon, in 1987, multiplying by 160 in nominal terms

at the beginning of 1988 and getting practically at level in USD. Notwithstanding the stock

market crash that same year, we see how the purchasing power of the savers was maintained

through the stock market, while the investors in bonds (denominated in local currency) or in

Mexican pesos lost 95% of their investment permanently."

Here's some charts of that performance based on the above table. Now I am not one massively into technical analysis but what is interesting is to see how the bottom range in both USD and MXN acted as a fairly steady support through the period while the top-end of the market just swung around like crazy. I suspect while this may have some stuff to do with people looking at buying at long-term moving average supports it is probably more to do with folks stepping in to buy at an inflation adjusted support level for the broader index based on book value/replacement cost (Tobin's Q). Clearly buying in when people are totally freaked out and at the bottom of the trading range would seem to be a decent long-term strategy.... assuming (and it's a big assumption) you can figure out the bottom of the trading range/where the support level is.

Here's a similar chart, although on a shorter time line from CIQ (their data for the Mexican IPC index only goes back to '83) and which only shows the monthly close rather than the range... as you can see it looks pretty similar but doesn't show the low-end support.