Pena Nieto Snack-Tax Agenda a Bane for Stocks: Corporate Mexico

Mexican President Enrique Pena Nieto’s efforts to bolster the economy are punishing stocks.

The benchmark IPC index has fallen 7.8 percent this year through 11:29 a.m. Mexico City time, the 12th-worst performance among 94 equity gauges tracked by Bloomberg. America Movil SAB, the wireless carrier that’s the heaviest-weighted stock on the index, fell 13 percent as the country’s new trust-busting institute ordered it to share networks with competitors.

Pena Nieto has pushed for rules to make telecommunications more competitive and increased taxes on soda pop, junk food and companies to help reduce Mexico’s dependence on oil revenue. While the government says such measures will eventually bolster growth, stock investors are more focused on the impact on company earnings and consumer demand.

“A lot of the reforms caused a downturn in terms of consumer sentiment,” said Geoffrey Pazzanese, a senior portfolio manager at Federated Investors Inc., who helps oversee the $500 million Federated InterContinental Fund. “The index is heavily weighted towards consumer products, and the consumer has been very sluggish in Mexico.”

The fund has sold its Mexico positions, he said. Consumer confidence in Mexico in February was at its weakest since April 2010, according to the national statistics agency.

In January, the government implemented a tax on sugary drinks and junk food to bolster non-oil revenue while encouraging Mexicans to lead healthier lives. That change helped lead to declines of 15 percent this year for snackmaker Grupo Bimbo SAB, 18 percent for soda distributor Coca-Cola Femsa SAB and 7.5 percent for convenience-store owner Fomento Economico Mexicano SAB. The stocks make up a combined 14.7 percent weighting of the IPC index.

Economic Growth

Gross domestic product expanded 1.1 percent in 2013, down from 3.9 percent in 2012. Carlos Fritsch, a strategist and president at research firm Prognosis, Economia, Finanzas e Inversiones SC, said the tax law will be a drag on the economy this year. The firm cut its projection for 2014 growth to 2.9 percent from 3.2 percent, according to a report this week.

“When you have a weak economy and at the same time you make tax changes, it’s a headwind,” Fritsch said in a telephone interview from Mexico City.

Fiscal stimulus will help the economy rebound as the construction industry recovers, Finance Minister Luis Videgaray said today in an interview at the Bloomberg Economic Summit in Mexico City. Government spending increased 19.9 percent in January from a year earlier and was also “robust” in February, Videgaray said as he reiterated the government’s forecast for the economy to grow 3.9 percent this year.

Carlos Slim

Pena Nieto signed a constitutional change last year to open the oil industry to private investment for the first time in 76 years. If implemented through effective follow-up laws, the country’s economic growth potential would climb to as much as 5.3 percent from 2.7 percent, according to Prologis.

“The government is thinking long-term and that’s what was needed,” Luis Rodriguez, Bolsa Finamex’s director of research in Guadalajara, Mexico, said in a phone interview. “But in the short term, the most important companies on the benchmark are all being affected.”

America Movil, controlled by Carlos Slim, the world’s second-richest man with an estimated fortune of $64 billion, has a 16.4 percent weighting on the 35-member IPC index.

Grupo Televisa SAB, which as Mexico’s dominant television broadcaster has an 8.6 percent weighting on the IPC, is up 7.9 percent this year because of investor optimism that its cable and satellite operations will help the company weather new regulations.

Bond Returns

Mexico’s local-currency bonds have returned 2.2 percent this year in dollar terms. The bonds have rallied 4.3 percent since Feb. 5, when Moody’s Investors Service raised Mexico’s credit grade to A3, its highest ever.

First-quarter company earnings will probably disappoint investors, buffeting stocks, Rodriguez said.

Coca-Cola Femsa’s net income will probably slip 1.5 percent to 11.4 billion pesos in 2014, according to estimates from Invex Grupo Financiero SA in an e-mailed report dated March 18, which cited short-term challenges including the sugary-drink tax.

“The market is going to remain volatile in the near-term,” Rodriguez said.

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