Photographer: Cesar Rodriguez/Bloomberg

Top Mexico Stock-Picker Says Country's Benchmark Gauge Expensive

  • Earnings yield on IPC index is lowest in more than six months
  • Pichardo’s MXE fund beat peers by buying Nafta-exposed stocks

Mexico’s most popular stock gauge has gotten too expensive, at least by one measure, according to Maria Eugenia Pichardo, chief executive officer at Mexico City-based Pichardo Asset Management.

Pichardo, who manages what was the best-performing Mexico stock fund last quarter, says it’s gotten harder to justify investing in the benchmark gauge on a valuation basis as the nation’s interest rates have climbed. At 4.06 percent, the earnings yield on Mexico’s IPC index is the lowest in more than six months -- meager, compared with the 7.1 percent yield on Mexico’s benchmark government bond.

“As rates have increased in Mexico, it’s really important that you make sure you’re getting paid to invest in stocks,” she said. “The IPC shouldn’t keep increasing from a fundamental point of view. If we find their valuation isn’t attractive, we’ll continue to stay out of those high-valuation stocks.”

Maria Eugenia Pichardo

Photographer: Susana Gonzalez/Bloomberg

Pichardo’s view contrasts with a growing chorus of optimism toward Mexico, with strategists at Itau Unibanco Holding SA, Citigroup Inc. and Credit Suisse Group AG recently increasing exposure to Mexico stocks, even as the benchmark gauge climbs to fresh records.

Mexico’s central bank has raised its reference rate eight times in the past 16 months to try to contain inflation, which has risen as the value of the peso has plunged against the U.S. dollar. A 6.5 percent official overnight rate and an earnings yield of about 4 percent on Mexico’s benchmark gauge means the gap between the two is the widest since at least 2008, when Bloomberg started collecting data on Mexico’s official overnight rate.

“If you invest in a stock where the earnings yield isn’t higher than the reference rate, then you’re paying too much and you should put your money into the reference rate instead of going into a stock,” Pichardo said.

Fund Performance

Pichardo’s closed-end Mexico Equity and Income Fund returned 18 percent last quarter, the most among 92 funds that invest in Mexican stocks.

The fund outperformed by owning shares that took a beating after the U.S. presidential election amid concerns about strained U.S.-Mexico relations and the impact of a Nafta renegotiation. Examples include Corporacion Inmobiliaria Vesta, a real estate developer, auto parts makers Rassini SAB and Nemak SAB, as well as airport operator Grupo Aeroportuario del Centro Norte, she said.

“We saw the market had discounted substantially these names because of the uncertainty,” Pichardo said. “We think Nafta is going to remain in its essence. Hopefully by the end of this year, those oversold stocks are going to be the ones that deliver the best returns -- even though they’re not the most liquid.”

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