Why Is This Bolsa Holding Up So Well?

As investors flee other Latin markets, Mexico looks strong

It's the stock market that defies gravity. In a disastrous year for bourses worldwide, the Mexican bolsa is up nearly 2% in dollar terms. That's no mean feat--especially when you consider that the Dow Jones index is down 19%, while Brazil's Bovespa and Argentina's Merval are both off by more than 45%. And the bolsa's performance is even more impressive given that the Mexican economy will register virtually no growth this year. The country sends close to 90% of its exports north of the Rio Grande. So even if the U.S. economy starts to recover by mid-2002, Mexico still faces many months of factory closings, layoffs, and possibly corporate defaults.

Even so, Mexico has a lot going for it. Its macroeconomic fundamentals--from inflation to the level of foreign direct investment--still look good compared with those of other emerging markets competing for portfolio investment. "Mexico is still the most attractive market in Latin America and one of the most attractive globally," says Carlos Asilis, global emerging markets strategist for equities at J.P. Morgan Chase & Co. in New York. With Argentina headed for a debt default and the Brazilian economy foundering, managers of funds devoted exclusively to Latin stocks are shifting more of their money into Mexico. Besides, Mexican stocks are a bargain, trading at an affordable 10.5 to 11 times earnings, vs. 30 times earnings in the U.S.

That doesn't mean every company listed on the Mexican bolsa is worth investing in. Equity strategists at leading investment banks are advising clients to be wary of Mexican companies that depend heavily on exports. Companies that cater chiefly to the domestic market are a better bet, since consumers still have some money left in their pockets from last year's robust 6.9% economic expansion and two straight years of wage rises above inflation. Also, since this year's slowdown has not been accompanied by a surge in inflation, as has been the case in past economic crises, most Mexican households have yet to experience a reduction in their purchasing power, notes Gray Newman, chief Latin America economist for Morgan Stanley Dean Witter & Co.

FOOTWORK. The strength of domestic consumption has favored an assortment of companies. Among them is Wal-Mart de México. The unit of the U.S. retail giant posted a 14% year-over-year sales increase in the third quarter, grabbing market share away from rivals. "Even in an economic contraction, people have to eat," says Renato Grandmont, Latin American equities strategist for Deutsche Bank Securities in New York. Shares of Wal-Mex have climbed more than 20% since January, bolstering the overall market. (It's worth noting that just six stocks make up over two-thirds of the weight of Mexico's IPC index).

Even Mexico's banking sector, hard-hit by the 1994 peso devaluation, is considered a promising stock market play. In particular, analysts favor Spanish-run Grupo Financiero BBVA Bancomer, whose stock is up more than 40% this year. Bancomer, like other Mexican banks, has benefited from falling interest rates.

What impresses professional stock-pickers most, perhaps, is how quick-footed Mexican companies have been. "They've proven to be much more responsive to the slowdown than their Brazilian and Argentine peers, by engaging in significant cost-cutting," says J.P. Morgan's Asilis. Teléfonos de México, the country's leading telephone carrier, recently announced a 15% reduction in investment outlays for 2002.

But how long can the bolsa stay in positive territory? In the past, Mexican stocks cratered when the government stumbled into a financial crisis. No such catastrophe is on the horizon. An Argentine default could drag down Mexican equities, but most likely only briefly. The bigger threat is a prolonged U.S. recession. Layoffs at export-assembly plants account for the bulk of the 450,000 Mexican jobs lost this year. If the trend persists, domestic consumption will be hit. The bolsa may not defy gravity forever, but for now it's the best game going.

By Geri Smith in Mexico City

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