Mexican Stocks For Steel Stomachs

Mexico's stock market, once the darling of Wall Street, is not a pretty sight. Buffeted by devaluation and now by impending recession, the market is down almost 26% in pesos and 31% in dollars this year. Stocks are trading at levels not seen since September, 1993, before the North American Free Trade Agreement was passed. But investors willing to gamble on Mexico's long-term growth potential may find a few bargains in the wreckage--provided they have a strong stomach for risk and the patience to wait out the worst.

FUNDAMENTALS. One strategy is to stick with blue chips, looking for companies with strong management and limited foreign-currency debt exposure. At the top of most lists is Telefonos de Mexico, the telephone monopoly known as Telmex, which was falling even before the devaluation on fears it would lose market share once long-distance competition opens up next year. But in a country with fewer than nine lines per 100 people, there's still strong growth potential. "People will recognize those fundamentals over the long term," says C. Thomas Tull, CEO of Gulfstream Global Investors in Dallas.

Another blue chip that many analysts like is retailer Cifra, Mexico's largest. With no debt, a joint venture with Wal-Mart Stores, and strong management, Cifra is poised to weather an expected sharp drop in consumer demand and should pick up market share from competitors who can't match its efficiency. Analysts are also eyeing Cementos Mexicanos, known as Cemex, whose 43.5% drop in the value of its global depository receipts this year is thought sufficient to compensate for the risk of more than $3 billion in foreign debt. Indeed, some analysts argue blue chips are bottoming out. "If you look at Telmex and Cemex--are they going to go down any more?" asks Geoffrey E.J. Dennis, managing director at Bear Stearns & Co. in New York.

One stock many pros consider particularly enticing is Fomento Econmico Mexicano, widely known as Femsa, a brewer and soft-drink bottler that is trading at 70% of its book value in dollars. Mexico is the world's No.2 soft-drink market, and hard economic times won't squash the local habit of guzzling Coke at lunch. Femsa also controls about half of Mexico's beer market and boasts growing exports of brands such as Dos Equis and Tecate to the U.S.

Another popular strategy is to buy the pricey shares of exporters, expected to surge thanks to the weaker peso. Exporters "may not necessarily have fallen in price, but good stuff is still good stuff," says Alexander Anderson, research director at Abaco Casa de Bolsa in Mexico City. He favors steelmaker Grupo Alfa and cement companies that sell abroad, including Cemex and Cementos de Chihuahua.

But even these bolsa bargains aren't enough to persuade some analysts, as interest rates climb and further darken earnings prospects. "We think in the short term that the money market is more attractive," says Luis de Urquijo, director of research at Vector Casa de Bolsa in Mexico City. For non-Mexicans, he recommends buying short-term peso-denominated treasury certificates called Cetes that yield as much as 50%, along with a hedging instrument to compensate for currency risks. Tesobonos, dollar-indexed instruments now yielding about 17%, have their advocates, too. "Tesobono rates are so generous they compensate for the ample risks that exist," says Lawrence Krohn, senior economist for Latin America at Union Bank of Switzerland in New York.

Still, most brokerage houses won't buy Mexican government bonds for retail customers in small quantities. At Vectormex, Vector's New York subsidiary, the minimum purchase for bonds is $100,000. So the easiest way for average investors to tap those rates is still through an emerging-markets fund.

Whether investors pick fixed income or equity buys, analysts warn that Mexican financial markets could be tumultuous until the peso stabilizes and the economy shows signs of recovery. That could take most of this year--at the least. "So much depends on psychology," says UBS' Krohn. These days, Mexico is only for investors who can look past the anxiety of the moment--and very, very far into the future.

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