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 Business News | May 2007 
Investors Flock to Mexico's Rally
 Anthony Harrup - dowjones.com
Mexico City - Despite an economic slowdown this year, Mexican stocks are on a roll, continually setting records as investors bet things are likely to pick up.
The local market's leading IPC index snapped a six-session winning streak yesterday, closing down 1.7%, or 531.26 points, at 30338.58 - but has been tantalizing investors with the prospect of a close above 31000. Analysts are convinced there is room for advances.
Gerardo Copca, an analyst at the Metanalisis consultancy, said yesterday's profit-taking was normal after the IPC soared to an intraday high of 31171.60 the previous session, before closing below 31000. He expects investors will soon push the index above 31000.
This week's test of 31000 has been typical of the recent behavior of the IPC, which flirted for days with resistance at 30000 before closing above that level earlier this month.
The rally that has pushed the IPC up nearly 15% year-to-date has led some analysts to wonder about the market's valuations as it heads for a fifth straight year of gains. Citigroup said it thought valuations were rich when it cut Mexican equities to "underweight" from "neutral" in April.
Pedro Zorrilla, adjunct director general of the Mexican Stock Exchange, said in an interview that local stock prices are supported by macroeconomic stability, including several years of single-digit interest rates, historically low country risk, and inflation levels approaching those of the country's main trading partners.
Positive company results also justify valuations, which are "reasonably in line with other markets, cheaper than developed markets and similar or a bit higher than other emerging markets," he said.
Another source of optimism in the local market came in March when the opposition Institutional Revolutionary Party, or PRI, supported a government reform to the state-workers pension system, generating expectations that a tax reform would then follow.
Many expect the PRI will join the ruling National Action Party to pass tax-reform measures before discussions begin on the 2008 budget, to be submitted to Congress in September.
Passage of reforms would increase the likelihood of sovereign-credit upgrades, and could contribute to investors accepting even higher multiples for stocks, Mr. Copca said.
Ixe Grupo Financiero's brokerage house cited all those reasons and others this week in raising its year-end outlook for the IPC to between 33800 and 35750, compared with its previous estimate between 29000 and 31000.
Abundant global liquidity is also playing a role in gains for Mexico's and other stock markets in the region - Brazil's Ibovespa index is up 14% on the year, and Chile's Ipsa index is up 17% - as investors seek attractive returns in emerging markets. (See related article on Brazil's currency.)
The economic slowdown remains a risk to Mexican stocks. Gross domestic product rose 2.6% year-on-year in the first quarter, down from 4.3% in the fourth quarter, and manufacturing slipped 0.1%.
The Finance Ministry cut its 2007 GDP expansion estimate to 3.3% from 3.6%, but says it expects the pace to pick up in 2008 to as much as 4%. The Bank of Mexico has lowered its 2007 projection by half a percentage point to between 3% and 3.5%.
"It's a concern that the slowdown could influence second-quarter results, and bring about a certain adjustment, but the trend is upward and it would serve as a buying opportunity," said Mr. Copca, whose consultancy has a year-end estimate of 34500 for the IPC.
China Weathers Greenspan; Tokyo Ends a 3-Day Streak
Many Asian and European markets slumped after former Federal Reserve Chairman Alan Greenspan said Wednesday that he expects a contraction in China's markets.
Mr. Greenspan's comments were reported in China by the country's state-run media, but the reaction was mixed. Economists and Chinese regulators have been urging investors to heed the potential risks of the recent stock-market frenzy, warning that corrections are inevitable.
In SHANGHAI, shares fell slightly. The benchmark Shanghai Composite Index, which tracks both Class A and Class B shares, declined 22.57 points to 4151.13. Individual investors have poured into the Chinese market, shifting savings from banks to stocks in hopes of reaping higher returns. That has fueled a 55% surge in the Shanghai benchmark index this year, after it soared 130% last year.
In TOKYO, shares snapped a three-day streak of gains, with selling focused on real-estate, department-store and consumer-finance shares, although gains by blue chips like Japan Tobacco limited losses. The benchmark Nikkei Stock Average edged down 8.15 points to 17696.97.
In LONDON, the metals sector declined, offsetting a 2.8% rise from telecom operator Cable & Wireless after it said a recent turnaround in some operations, including the United Kingdom, is ahead of schedule. Shares in newspaper publisher Daily Mail & General Trust lost 2.1% after it said first-half net income dropped.
Hong Kong and South Korea were closed for a holiday.
In TORONTO, after five days of new highs, stocks ended lower, led by declines in resource stocks. The S&P/TSX Composite Index fell 196.24 points, or 1.39%, to 13946.27.
Write to Anthony Harrup at anthony.harrup@dowjones.com |
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