| | |  Business News | February 2009 
Priciest Mexican Stocks in a Decade Signal Losses
 Michael Patterson - Bloomberg
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Mexican stocks, Latin America’s worst performers this year, are pricier than their emerging-market peers by the widest gap in a decade, a sign they may drop more.
Mexico’s Bolsa index has tumbled 13 percent this year while benchmark gauges in Brazil, Argentina and Chile climbed. Even after the declines, Mexican shares fetch about 52 percent more than all emerging-market stocks, the biggest premium since 1998, based on monthly price-to-earnings ratios for MSCI indexes as of the end of January.
Roberto Lampl, an ING Groep NV money manager in the Hague, has been selling Mexican shares from his $232 million ING L Invest Latin America fund, which beat 99 percent of its competitors over the past five years. Investors have misgauged how much profits will fall as a deepening U.S. recession chokes demand for Mexican exports, remittances from expatriates in the U.S. slump and the domestic economy contracts, Lampl said.
“The risk is on the downside for Mexico,” he said. “The economy will slow down more than the market expects.”
The MSCI Mexico Index, a benchmark for international fund managers, ended January valued at 12.6 times its companies per- share profits, compared with 8.3 times for MSCI’s developing- nation gauge. The last time the premium was so high - during the aftermath of Russia’s August 1998 debt default - the MSCI Mexico Index underperformed the broader emerging market benchmark by 10 percentage points over the next 12 months, according to data compiled by Bloomberg.
Today’s Gains
The MSCI Mexico Index today climbed 1.2 percent, while the Bolsa added 0.1 percent. The MSCI Emerging Markets Index increased 2.1 percent.
MSCI’s Mexico gauge dropped 44 percent last year, less than the 54 percent decline in the emerging-markets measure, as Telefonos de Mexico SAB, the country’s largest fixed-line phone company, and Coca-Cola Femsa SAB, Latin America’s biggest soft- drink producer, each advanced more than 12 percent.
Mexican President Felipe Calderon told bankers in New York in late September that he was confident Mexico would be able to “mitigate” the effects of the credit crisis that began in the U.S. mortgage market.
“People say that when the U.S. catches a cold, Mexico gets pneumonia,” Calderon said at a lunch at the Waldorf-Astoria Hotel on Sept. 25. “This is not the case today.”
Phone, Beverage Shares
Mexico’s phone and beverage companies, which comprise more than half of the country’s MSCI index, rose last year on expectations their earnings would hold up better than profits at energy and financial companies that account for the biggest proportion of emerging-market stocks worldwide, said Nick Field at Schroder Investment Management, which oversees about $156 billion in London.
Fund managers who invest in developing nations had Mexico, along with China, as their biggest consensus “overweight” holding as recently as December, according to monthly data compiled by JPMorgan Chase & Co. and Cambridge, Massachusetts- based EPFR Global. On Jan. 29, JPMorgan advised clients to hold more Mexican stocks than their benchmark index. Ben Laidler, the bank’s head of Latin America equity strategy, says Mexican earnings will weather the crisis, the government will boost spending to revive growth and U.S. demand may recover in the second half of 2009.
Although so-called defensive stocks in Mexico often outperform in a declining market, the nation’s worsening economic outlook is a reason to be “underweight” the country, Schroder’s Field said.
‘Badly Affected’
“From our point of view, GDP wins,” he said. “The economy is probably going to be badly affected.” Telefonos de Mexico and Coca-Cola Femsa have more than given back last year gains, losing 20 percent and 14 percent, respectively in 2009.
Mexico’s gross domestic product expanded 1.6 percent from a year earlier in the third quarter, compared with 6.8 percent in Brazil, and the slowest rate among Latin America’s six biggest economies. The Finance Ministry said in January the economy probably contracted 1 percent in the fourth quarter. The central bank predicts GDP may shrink as much as 1.8 percent this year.
Manufacturers in Mexico cut about 150,000 jobs during the four months through January as the recession in the U.S., which buys about 80 percent of the country’s exports, eroded demand for its cars and appliances. Consumer confidence is at a record low after expatriate Mexicans sent home 3.6 percent fewer dollars last year than in 2007, the first decline in remittances since the central bank began tracking the data in 1995.
Peso Drop
The weakening economic outlook contributed to a 26 percent slide in the Mexican peso in the past five months, the biggest drop against the dollar among the 16 most-traded currencies. Five-year credit-default swaps on Mexico’s bonds, a measure of the cost of protecting debt against default, have climbed about 60 basis points to 4.09 percentage points in the past three months, Bloomberg data show.
Mexican billionaire Carlos Slim, who controls Telmex, told lawmakers this week that Mexico’s gross domestic product will “plunge” and unemployment will increase to record levels.
“The close proximity to the U.S. is taking a toll on Mexico’s economic activity,” said Warren Skillman at The Boston Co. Asset Management LLC, which oversees about $36.1 billion in Boston. “More opportunities are presenting themselves in other parts of the asset class”
The deteriorating economic outlook prompted analysts to cut about 30 percent of Mexican companies’ profit estimates in January, according to Morgan Stanley.
Domestic Sales
Mexican companies’ reliance on local customers to increase earnings makes them less attractive as the economy contracts, Skillman said. Companies in the MSCI Mexico Index get about 70 percent of sales from home on average, according to Bloomberg data.
The nation’s stocks have fallen at a slower pace than the earnings forecasts, an indication shares may drop further, Morgan Stanley strategists Jonathan Garner and Vinicius Silva wrote in a research note last month.
The average analyst estimate for Mexico City-based Wal-Mart de Mexico SAB’s 2009 per-share earnings dropped 10 percent from mid-October to 1.9 pesos yesterday, while the shares gained 5.3 percent during the same period, according to Bloomberg data.
To contact the reporter on this story: Michael Patterson in London at mpatterson10(at)bloomberg.net. |
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