Mexican Stocks More Attractive Than Bonds to Citigroup This Year

  • Central bank rate rises will push bond yields up, prices down
  • Mexican consumer-spending recovery to lift retailers

Mexican bonds have beaten stocks in each of the past three years. That is set to change in 2016, according to Citigroup Inc.’s local unit.

Mexico’s central bank last month raised borrowing costs for the first time since 2008, following the U.S. Federal Reserve in a bid to discourage investors from dumping Mexican assets. The bank increased the rate by 0.25 percentage point to 3.25 percent and traders expect the rate to reach 4 percent in the next year. 

Higher interest rates will curb bond returns even as stocks benefit from a recovery in consumer spending, said Arnulfo Rodriguez, the deputy director of research at Citigroup’s Mexico unit Banamex. Retail sales in Latin America’s second-largest economy rose 4.8 percent in October from a year earlier, the latest data available, and Rodriguez expects the trend to continue.

“The year is looking complicated for fixed income," he said from Mexico City. “Significant returns will come from equity. Many Mexican companies have good outlooks as we see domestic consumption strengthening."

Consumer and retail companies such as Starbucks and Burger King operator Alsea SAB, department store chain Puerto de Liverpool SAB and Wal-Mart de Mexico SAB were among the five best-performing stocks in Mexico’s benchmark IPC index last year, with gains of at least 37 percent.

Investors should consider combined funds that include both fixed and variable income, Rodriguez said. He prefers corporate and government inflation-linked bonds to protect from any rate hikes as well as dollar-denominated bonds, of any maturity, to hedge against further weakening in the peso.

The currency hit a record low on Friday, falling 0.4 percent to 17.9156 per dollar at 10:06 a.m. Mexico time and extending its 12-month decline to 18 percent.

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