Mexico Bulls May Be Heading Over A Cliff

Just seven months after a currency crisis sent investors stampeding out of the Mexican market, the battered Bolsa is charging back. In the past month alone, the index has climbed about 25% as investors went bottom-fishing, searching for value plays and scooping up blue-chips. The rally, pundits proclaim, puts Mexico back on the emerging-markets map.

Not so fast. The numbers are deceptive. The market's latest spurt, which brought the Bolsa to a high of 2575 for the year, still leaves the index far from its record of 2881 last year. Moreover, the 4% rise so far this year, after adjusting for the devaluation of the peso, shows a loss of more than 13% in dollar terms. And the Bolsa has stumbled in recent days.

True, there is some positive economic news to spark investor interest. Domestic interest rates are falling, with the 28-day Treasury Certificate at 41%, down from a high of 83% in March. Inflation was down to a monthly rate of 3.2% in June. The peso is stabilizing. And Mexico has had a trade surplus for several months now, helping reverse a $28 billion current account deficit. The U.S. interest rate cut also revived interest in emerging markets. "Foreign investors are buying the feasibility of the economic program," says Juan Carlos Torres, director of equity analysis at Grupo Financiero Serfin in Mexico City.

But Mexico's problems are severe. Mexican Finance Minister Guillermo Ortiz admits that the country's economy is in a deep recession, with gross domestic product expected to shrink by 4% this year. "Some of the fundamentals are still pretty bad," says Jeffry H. Taylor, chief Latin American economist and investment strategist for NatWest Securities. "A lot of people say the worst is over, but I'm not so sure we can say that yet."

Investors may get that message as second-quarter earnings start rolling in. While a few companies will report small boosts from price increases made last spring, all but exporters will confirm the economy's dismal performance. Although some analysts say the market has discounted those results, a correction may be in the offing as investors dump the underperforming companies and take profits on the stronger players.

BRIGHT SPOTS. Some companies, particularly exporters, are prospering in Mexico's weakened economy, however. Those with revenues from exporting or foreign holdings, such as cement-maker Cemex and mining company Industrias Peoles, have a stream of hard currency revenues. Where the bulk of their costs are in devalued pesos, these companies should be reporting increased margins.

Despite the strong exporting picture and a few good economic numbers, some investors want more proof that Mexico is on the right track. William Truscott, a member of the Latin American equity group at Scudder Stevens & Clark Inc., refused to join in the recent buying spree and even took a few small profits during the rally. Now he's neutral, noting that "political risk has not diminished one iota."

Such worries are likely to prevent the market from rising much higher this year. Bolsa prices already reflect investors' expectations that the economy will limp toward growth next year. Inflation is expected to reach an annual rate of 55% in 1995. "The corporations can't do well without the country doing well," says Truscott. The bulls might want to heed that, if they don't want to get gored by the market once again.

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