Why The Bolsa Is Boiling

Mexican stocks have been on a tear, and some see more room to run

Homex (HXM ) is a stock with the kind of story investors love. There's a real shortage of low-priced housing in Mexico: a deficit of some 5 million dwellings, with demand growing by 700,000 units a year. That's great news for companies like Homex, a booming developer of entry-level and middle-class housing based in the northwestern state of Sinaloa. So on June 29, the company easily raised $141 million through an initial public offering on the Bolsa Mexicana de Valores and the New York Stock Exchange. In its first three weeks of trading, its share price shot up 13%. "There are huge housing needs in Mexico, and this demand will continue for years and years," says Robert Berges, a Latin America equity strategist at Merrill Lynch & Co. (MER )

Homex isn't the only top performer on the Bolsa. Indeed, the Mexican stock exchange as a whole has been on a tear, outperforming the Standard & Poor's 500-stock index not only last year but for the past three years -- and in terms of both dollars and pesos. The Bolsa has risen 46% in pesos and 33% in dollars over the last 12 months, while the S&P gained 17%. Since July, 2001, the Bolsa has surged 54.2% (24.8% in dollars), vs. a 6.8% slide in the S&P. This year, the Mexican market is up 13.5% -- despite a drop from its Apr. 12 high triggered by concern over the pace of economic recovery in the U.S. The S&P? It's down 2.4%.

Wait a minute. Is this the same Mexico that has been plagued by political gridlock since the election of President Vicente Fox in 2000? Where urgent economic reforms have been stuck in Congress, hurting competitiveness and prompting hundreds of export-industry factories to move to lower-cost China? Where growth has been anemic?

All that is true. But it's not the whole story. While Fox has largely been a disappointment, he has continued the policy of fiscal discipline he inherited from his predecessor, Ernesto Zedillo, who guided the country out of a currency crisis. Central Bank Governor Guillermo Ortiz has been an inflation hawk, bolstering the peso and giving Mexico enough standing in the markets to earn it an investment-grade rating on its sovereign debt in 2000. Although the North American Free Trade Agreement has not been a cure-all, it has still turned Mexico into a major export manufacturer. The Mexican economy also has been buoyed by low global interest rates and high oil prices -- Mexico is the world's sixth-largest oil producer. Moreover, the bursting of the tech bubble in 2000 hurt the U.S. market more than it did Mexico's. For all these reasons, Mexican stocks have become something of a blue-chip emerging-market play. "When markets struggle globally, Mexico tends to outperform," says Berges.


To be sure, Mexico is still dependent on trade with the U.S., where it sends nearly 90% of its exports. The U.S. economic slowdown from 2000 to 2003 hurt Mexican electronics and auto-parts exporters. But experts say the export downturn was offset by rapid growth in domestic businesses, such as retailers, food processors, beverage companies, cement makers, and mobile telecom providers. Overall, the Mexican economy is expected to grow 4% this year, while corporate profits have increased 28% on an annual basis in the first half.

The profit growth has pushed up prices of domestic-centered stocks such as TV network Grupo Televisa (TV ), which should benefit from greater advertising expenditures. Its shares are up 20% this year. Another rising star is América Móvil (AMX ), the regional wireless carrier controlled by tycoon Carlos Slim. Its stock has soared 30% this year. One reason for the fat profits at big Mexican companies: lax regulation. That has made it easy for monopolies and oligopolies. "They make a lot of money, and that's good for their stock," says Mario Epelbaum, Latin America strategist at Morgan Stanley (MWD ).

While that may seem good for investors in the short run, Mexico's failure to complete the structural reforms that would make the economy more competitive could cramp growth over the long haul. Even so, stockpickers see continued upside potential. "Mexico is a growth story, an emerging-markets story, and a valuation story, and I think it will be one of the big winners this year," says Geoffrey Dennis, a Latin America equities strategist at Smith Barney (C ). A winner? No one's saying that about the S&P 500.

By Geri Smith in Mexico City

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