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 Business News | April 2007 
Citigroup Downgrades Mexico to Underweight
 MarketWatch
Citigroup has downgraded the surging Mexican stock market to underweight from neutral, citing market overreaction to the recent passage of pension reform, high company valuations and the country's slowing economy.
The downgrade comes amid strong gains on the Mexican stock market. The benchmark IPC index is up 13.4% on the year, making it the second-best performing market in Latin America after Chile, where the IPSA index is up 15.3% on the year.
Citigroup also increased its overweight in Brazil and Chile. In Brazil, Citigroup is overweight in the financial sector, consumer staples and telecoms; it's neutral in the energy sector and underweight in materials.
In Sao Paulo, the benchmark Bovespa index has gained 9.4% on the year. In Argentina, the Merval index is up 6.8% on the year.
The Mexican Bolsa fell 10.2% between Feb. 21 and March 5, but has since rebounded in a short period of time. The MSCI Mexico Index rose more than 7.5% in March, outperforming the MSCI Emerging Markets Latin America Index which gained about 7% last month.
"There is no tangible short-term benefit for the Mexican equity market from the recently passed public pension reform," wrote Geoffrey Dennis, analyst at Citigroup, in a research note.
The bank said that Mexican valuations are expensive on nearly all of its metrics.
In late March, the government of President Felipe Calderon passed the civil servants' pension reform, the so-called ISSSTE reform, which establishes a defined-contribution plan and increases the retirement age. The reform resembles the private-sector pension reform passed in Mexico a decade ago.
The stock market reacted with euphoria to the passage of the ISSSTE reform. A day after the law's passage, Fitch Ratings changed the outlook on Mexico's long-term foreign and local currency sovereign-issuer default ratings to positive from stable. See full story.
"The positive market reaction was mainly due to enhanced prospects for future reforms," Dennis of Citigroup said.
The market is optimistic about future reforms because of President Calderon's rising influence with legislative groups. Calderon has demonstrated more political agility and ability to work with opposition parties than his predecessor, Vicente Fox.
Last summer, Calderon of the conservative National Action Party won a narrow victory against the left-wing candidate Andres Manuel Lopez Obrador, who challenged Calderon's win in court and rallied a wave of street demonstrations.
Proposed reforms in the first half of the Calderon administration up to the end of 2009 will likely be limited to fiscal and electoral reform, according to Dennis. The most viable fiscal reform is reducing and simplifying income and corporate taxes. In terms of electoral reform, the debate is whether legislators in various levels of government should be allowed to run for re-election. Mexico also needs to reform its labor laws and the energy sector, but Citigroup thinks those reforms are unlikely.
The bank said that Mexican valuations are expensive on nearly all of its metrics. Besides, Mexican equities are less attractive compared with bonds on a yield basis. The economic slowdown in Mexico also has contributed to the downgrade; Citigroup has revised its 2007 GDP forecast to 3.4% from 3.6%. |
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