Fiesta Time For The Bolsa

Mexico's market is jumping, and foreign investors are enjoying the party

Mexico is hot, sizzling hot. The Bolsa index is up 31.1% this year in dollar terms. And U.S. investors are tumbling in, eager for returns that would do a hedge fund proud. "These are magnificent times," says Selene Avalos, chief financial officer of Urbi, a housing developer based in Mexico's Baja California capital of Mexicali. Avalos is touring the U.S. and Britain trumpeting Urbi's prospects to institutional investors. They love the story: Urbi's share price has advanced 56.8% this year.

More than a decade after Mexico's last big crisis, the country is in a sweet spot. Public finances are in excellent shape, and government debt carries an investment-grade rating. Although manufacturing sales to the U.S. are sluggish and will keep growth to 3% this year, oil exports are bountiful, interest rates are low, and expanded bank lending has kept consumption rising. Foreign currency reserves are at an all-time high of $65 billion. As a result, since late 2000 the Bolsa has gained 130% in dollar terms, while the Standard & Poor's 500-stock index has slid 13%.

Foreign buyers, many of them from the U.S., are taking part in the runup: Almost 45% of Mexican shares are owned by outsiders. "When global investors decide they want a little action, they look for liquid stocks whose names they recognize, and the apocryphal dentist in Kansas City has probably heard of Telmex (TMX ), Televisa (TV ), Cemex (CX ), and Femsa (FMX )," says Geoffrey Dennis, Latin America equities strategist at Citigroup (C ) in New York.

The other trend drawing in money is a housing boom. The mortgage market was once almost nonexistent, since periodic financial crises would push debtors into default. Now banks are offering 20-year loans to middle-income buyers, and the government is building record amounts of housing for the working class. This year 750,000 mixed-income houses will be built, boosting the shares of Urbi, GEO, and Desarrolladora Homex (HMX ), three of the biggest developers. All told, Mexico still has a deficit of 4 million homes. "The demand is there, private and public financing is there, and the political backing is there," says Todd McClone, co-manager of the Emerging Markets Growth Fund of William Blair & Co., a Chicago investment firm that is Urbi's biggest investor. "That's a growth story that can last 10 years and beyond."


The market is further buoyed by the 65 Mexican companies that trade easily in the U.S. as American depositary receipts (ADRS). Among the best-performing is América Móvil (AAMX ), the regional cell-phone business run by billionaire Carlos Slim; its shares are up 55.4% this year. Wal-Mart de México (WMMVY ), which already has 751 supermarkets, wholesale clubs, and restaurants in the country, has seen its share price rise 53.7%. Even though cement giant Cemex earns 80% of its sales abroad, the domestic building rush has helped push its stock up 47.7%. "No wonder you've had this flood of money coming in," says Citigroup's Dennis.

In the past, Mexican presidential elections could be counted on to trigger an economic crisis. But the 2000 vote went smoothly, and the upcoming 2006 election hasn't caused tremors, even though front-runner Andrés Manuel López Obrador leans left. A victorious López Obrador would not command a congressional majority and so would not be able to make radical policy changes. Moreover, Mexico now has an independent central bank to keep an eye on monetary policy.

The one thing that could give the Bolsa a jolt would be a sharp drop in oil prices, since oil exports mask a deteriorating trade balance. But no one is predicting such a plunge. The Bolsa will undoubtedly sag some day, but for foreign investors it's still an attractive place to visit.

By Geri Smith

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