To many stock investors, Mexico had started to look almost like a First World market. American Depositary Receipts in Telefonos de Mexico were the most actively traded issue on the New York Stock Exchange last year. The Bolsa de Valores was relatively resilient in the face of assassinations, peasant uprisings, and a presidential election. And ratification of the North American Free Trade Agreement made Mexico seem even more like an extension of the good old USA.
Then the peso crisis reminded everyone that Mexico is still a developing economy. Now, while long-term believers have not abandoned their faith, even staunch Mexico bulls admit the market will feel the effects of a decimated currency and shaken confidence for much of 1995. The Bolsa is down 28% in dollar terms since Dec. 16 and may not have hit bottom. "The market is still not fully discounting fourth-quarter numbers," says Nigel Rendell, James Capel & Co.'s London-based Latin America strategist. "There could be lots of nasty surprises ahead when [companies'] foreign debt comes out."
For bargain hunters with strong stomachs, one way to approach the carnage is to look for companies with strong foreign sales and little dollar-denominated debt, since they are least exposed to the incredible shrinking peso. Using these criteria, Ricardo Pen at Baring Securities in Mexico City recommends IndPound strias Peoles, which accounts for 11% of world silver production, and Situr, whose tourism business should thrive and whose real estate, valued in dollars, is appreciating by the day. Pen's picks also include Transportacin Martima Mexicana, since shipping will benefit from rising exports.
What of beloved Telmex? With its ADRs down to $37, from $75 last February, the telecommunications giant looks attractively valued, says Marianne Bye, Lehman Brothers Inc.'s telecom analyst. She points out that although the Jan. 3 program announced by the government suggested a faster schedule for opening the phone market to competition, "the monopoly was supposed to expire in August anyway." So Telmex is no more vulnerable than before the crisis--just a lot cheaper.
BUY SIGNAL. That's how professional contrarians, like Franklin Templeton fund manager Mark J. Mobius, feel about many Mexican stocks right now. To Mobius, a market crash is often a buy signal, and in Mexico's case he is even looking at companies with severe peso exposure. "Our feeling is that a lot of the banks are undervalued," he says. While investors worry about margins, foreign competition, and consolidation, he thinks banks such as Bancomer and Banca Serfn will flourish in the long term.
Retail investors seem to want to keep liking Mexico. After a week of net redemptions in open-end mutual funds that concentrate on Mexico, money has begun flowing back in, according to Morningstar Inc.--despite the drop in the funds' share value. Still, Mexico's low-risk image has been dimmed, and once its budget details are released and analysts publish their earnings projections, the Bolsa could give another loud crash. Just as there's no free lunch, there's no emerging market that delivers the rewards without the risks.