Mexico Has Nowhere To Go But Up. Right?

Interest rates are over 50%. The economy shrank by more than 7% in 1995. More than 1 million people have lost their jobs. Political scandals keep mounting. So why do many experts say it's time to return to the Mexican stock market, where the Bolsa index was down 26% in dollar terms in 1995? Because investors who wait for the economy to lumber back to growth may be too late.

One year after the peso devaluation drove investors from Latin American markets, many analysts are suggesting selective buying in Mexico. Aside from cheap stock prices for foreigners, observers are encouraged by falling interest rates, a halt in job losses, and higher cement consumption--all indicators that the Mexican economy may have bottomed out. Jorge Mariscal, head of Latin equity research at Goldman, Sachs & Co. in New York, estimates that the Bolsa Mexicana de Valores could rise 20% in dollar terms over the next 12 months. "If you wait until there is concrete evidence of economic growth, then it's time to sell," he argues.

Nobody expects such signs to be popping up all over in 1996. Most economic forecasters are looking for expansion of no more than 2%. So the pros advise caution. For many analysts, that means sticking with exporters, since domestic consumption is likely to remain depressed. Mexico shipped 33% more abroad during the first nine months of 1995 compared with the same period in 1994, in dollar terms. The country's steel, mining, and chemical companies benefit from high international prices while their costs are in undervalued pesos. Many have expanded capacity. Shares in copper miner Grupo Mexico, for example, are up 25% in dollars for the year, and the company found heavy demand for a recent $525 million debt sale.

NEW CONTRACTS. But picking the right exporter is tricky. If the peso strengthens against the dollar, as some expect, margins will shrink. Among conglomerates, many recommend Alfa, the steel and petrochemical giant, and Desc, a holding company with interests in chemicals and auto parts. Analysts' favorite steelmaker is Altos Hornos de Mexico, given its long-term growth potential.

The intrepid may want to bet on companies that supply to the domestic market. With its stock depressed by the market fall, retailer Cifra is Mexico's bargain blue chip. It has no debt, a commanding market share, and a world-class partner in Wal-Mart Stores Inc. But investors must be willing to wait a couple of years to see returns. Paper products company Kimberly Clark de Mexico has raised prices, increased market share by replacing more expensive imports, and pared production costs.

Even in two of Mexico's hardest-hit sectors, construction and banking, there are worthy picks. Engineering and construction company Bufete Industrial has won new contracts abroad this year and picked up work from expanding Mexican exporters. The country's largest bank, Banacci, is likely to emerge stronger after the crisis.

Of course, the Mexican market remains highly risky. While the peso has stabilized at about 7.7 for now, more currency jitters would delay recovery. No one can predict if Mexicans will tolerate a continued erosion of living standards in 1996. The corruption scandal surrounding the brother of former President Carlos Salinas de Gortari continues to simmer. But investors willing to hang on may be rewarded. Says Alexander Anderson, research director at the Abaco brokerage house in Mexico City: "You only need a lot of patience and a pretty strong stomach." Especially the latter.

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