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 Business News | November 2006 
Mexican Stocks May Falter After Rally as Growth Slows
 William Freebairn - Bloomberg
| | A donkey painted to look like a zebra for tourist photos in Cancun, Mexico. (Reuters/Jorge Duenes) |
Mexico's four-year stock rally may end as economic growth slows and investors shun shares that have become too expensive.
The Bolsa Index is up 36 percent this year, reaching a record yesterday, on the fastest economic growth in six years. It has almost quadrupled since the end of 2002, the longest streak since the peso was devalued in 1994. Rising profits have failed to keep pace, pushing the price-earnings ratio of the index's stocks to a two-year high.
"We are somewhat bearish on Mexico at this point," said Matthew Hickman, who helps oversee $5 billion in emerging markets stocks, including $500 million in Latin America, at Credit Suisse in New York. "We think valuations have become a little stretched and we think the market is somewhat complacent about the political challenges that face Calderon at the start of his new government."
President-elect Felipe Calderon was declared president by court decision after two months of legal challenges and street protests. His opponent, Andres Manuel Lopez Obrador, lost by less than a percentage point and says the election was fraudulent.
America Movil SA, Latin America's biggest cell-phone company, and Wal-Mart de Mexico SA, the region's biggest retailer, have led gains this year. Profit growth for the country's biggest companies will average 16 percent this year, said analyst Carlos Ponce at IXE Casa de Bolsa in Mexico City. That is lower than the 20 percent growth in the first half of the year, he said.
Political Obstacles
Companies in the Bolsa now sell on average for 14.8 times profit for the past year. That compares with a price-earnings ratio of 11.6 for Brazil's Bovespa Stock Index and 13.2 for Latin American markets overall, as measured by a Morgan Stanley Capital International index. On Oct. 25, the Bolsa rose to the highest price-earnings level since September of 2004 and was 64 percent higher than it was in June, just before presidential elections.
The Bolsa's surge has been aided by telecommunications companies. America Movil and its holding company, America Telecom SA, account for 28 percent of the index. The stocks are up 50 percent and 78 percent this year, respectively.
The central bank estimates Mexico's economic growth will slow to 3.5 percent in 2007 from 4.8 percent this year because of an anticipated slowdown in the U.S., Mexico's largest trading partner. Auto manufacturing, which accounts for 10 percent of Mexico's industrial production, has declined as U.S. consumers reduce purchases, according to Mexico's Finance Ministry.
The Bolsa rose 0.2 percent to 24,241.19 at 12:00 p.m. New York time and earlier today rose as much as 1.1 percent to a record 24,458.76.
Reduced Holdings
"Valuations are looking a little high and growth might slow next year," said Urban Larson, who helps manage $2 billion in stocks in emerging markets at F&C Investments in Boston. "The U.S. is slowing and we've already seen a few signs that Mexico's growth might slow because of that." He said he is "neutral" on the Mexican market.
Larson said two funds he manages reduced their holdings in Mexican shares in July to below the proportion held by the MSCI Latin America index. Prior to July, the funds had owned a higher percentage of Mexican shares than the index, which is based on the amount of stock available to investors in each country.
The Bolsa fell for the first week in five at the end of October after the U.S. Commerce Department reported the U.S. economy grew 1.6 percent in the third quarter, less than the 2.1 percent forecast of economists in polled by Bloomberg. The U.S. buys about 85 percent of Mexico's exports.
Political Obstacles
Political discord may worsen the slowdown in the economy. On Nov. 6, three bomb blasts in the capital underscored the obstacles that Calderon faces in sustaining the expansion fostered by his predecessor, Vicente Fox. Fox's election ended 71 years of single-party rule.
Calderon's ability to spur growth with promised legislation to allow private investment in the oil industry may be hampered by a divided Congress. Supporters of Lopez Obrador formed a coalition to oppose the new president's agenda and have threatened to block Calderon's inauguration ceremony Dec. 1.
Protesters this year clashed with federal police after a teachers' strike in the southern state of Oaxaca escalated into calls for Governor Ulises Ruiz to step down. A group sympathetic with the protesters claimed responsibility for the Nov. 6 blasts, which damaged the electoral court, a bank branch and the headquarters of Ruiz's Institutional Revolutionary Party. The party backed a court decision to ratify Calderon's victory.
"We're at a very delicate point in this democratic transition," said Riordan Roett, professor of Latin American studies at Johns Hopkins University in Washington.
Retirement Funds
Some analysts say there's still cause for optimism about the stock market, even if the gains are smaller next year. IXE's Ponce forecasts that the Bolsa's rise will add another 14 percent by the end of 2007.
A regulatory change allowed domestic privatized retirement funds to begin investing in Mexican stocks in February. Only 2 percent of the 661 billion pesos ($61.1 billion) invested in such funds, known as Afores, was in stocks as of September, Ponce said. That figure will rise, he said.
"The Afores have a more important impact on the markets every day," Ponce said. Fourth-quarter financial reports should continue to show growth, he said.
"We continue to invest there and, in fact, during the recent political turmoil we added to our investments there since we feel that the political risks are low," said J. Mark Mobius, in an e-mailed answer to questions. Mobius, who oversees $30 billion in emerging market assets at Franklin Resources Inc. in Singapore, said his funds own shares of Telefonos de Mexico SA, Latin America's largest fixed-line telephone company, and paper- maker Kimberly-Clark de Mexico SA, among others.
Carlos Asilis, who manages $100 million in global assets for Vegaplus Capital Partners, likes other emerging markets better.
"Especially with the outperformance that Mexico has shown recently, I am more optimistic about Brazil," Asilis said. "The question is whether on a valuation basis the Mexican bourse is cheaper with regard to other markets."
To contact the reporter on this story: William Freebairn in Mexico City wfreebairn@bloomberg.net |
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