Investing in Mexico
Six years after the peso crisis, is Mexico poised for another boom?

By Staff Writer Martha Slud
March 11, 2000: 8:19 a.m. ET
http://cnnfn.com/2000/03/11/emerging_markets/mexico/

NEW YORK (CNNfn) - Nearly six years ago, many emerging markets investors were burned by the Mexican peso's devastating plunge.Now, after half a dozen rocky years that saw inflation mushroom and the currency thrashed, Latin America's second largest market is beginning to look a lot more attractive.

Mexico, which has long been one of the first choices for many Americans looking to invest in emerging global markets, has struggled to claw its way back from the 1994-95 peso devaluation and subsequent recession. Inflation is expected to drop below 10 percent this year, while gross domestic product is on track to grow at a healthy 4 percent or more.

Meanwhile, the Mexican economy got a big boost earlier this week with the announcement that Moody's Investors Service, a top credit rating service, raised its rating on Mexican government debt to investment grade status for the first time.That put the country in the same league with South Korea, South Africa and Chile, the only other Latin American nation that currently holds the coveted rating. Colombia was considered investment grade,but its rating was cut last year.

Unlocking investments
    The upgrade makes it easier for the Mexican government to control its current account deficit as well as for companies to borrow money and finance expansion, improving corporate balance sheets.

It also opens the door for cash infusions by a flood of conservative U.S. institutional investors, such as mutual funds and pension funds, which generally cannot invest in emerging market assets because they are considered too risky.The upgrade unlocks an estimated $27 billion in existing Mexican debt to new investors.

"It's extremely significant. It's important for Mexico, and it's important for Latin America,"said Gray Newman, senior Latin American economist at Merrill Lynch in New York. "It's sort of seen as a seal of approval that the policies put in place and the condition of the economy is such that it warrants this kind of rating."

But Standard & Poor's, another key credit rating service, still rates Mexico two grades below investment status, citing concerns over the banking sector and the government's dependence on oil revenue.

Some investors also may be wary of plunging back into Mexico during the run-up to July's presidential elections.Over the past 25 years, Mexican presidential races - which take place every six years -- have sparked economic crises, although many experts say that is less of a threat this year because the country's fiscal management has stabilized.

 Still, observers say the Moody's upgrade is deeply significant for the Mexican market - the biggest in Latin America after Brazil - because it injects confidence into the economy and helps poise Mexico for long-term growth. It's also a rubber-stamping, they say, of the inflation-fighting measures and other fiscal moves the Mexican government has taken to bounce back from the mid-'90s recession.

"I think it's a crowning achievement for Mexico to have finally gotten to this point after the debacle of late 1994-95," said Michael Perl, portfolio manager of Morgan Stanley Dean Witter's Latin American mutual funds. "This is the combination of a series of events over the last few years."

In the wake of the upgrade, which was announced Tuesday, Mexican stocks and bonds jumped, as did the value of the peso against the dollar. Mexico's key IPC index offloading shares set an all-time high of 8,399.52 in intra day trading Thursday, before finishing the week Friday down 142.25 points,or 1.7 percent, at 8,177.42. The blue-chip index has risen more than 20 percent since the beginning of the year.

But is now the right time for investors to get back into Mexico?

Latin American stock strategists say that the best time, really, was last fall - when equity prices were particularly undervalued. But for those who missed out, it isn't too late, experts say, predicting that despite the recent run-up in Mexican stocks, equity prices still have higher to climb.

For Mexican companies, the upgrade "makes it more likely that they will invest, and makes their profitability higher, creating a more competitive and strong corporate sector.That's not something that's a five-day wonder --- it's a long-term factor," said Geoffrey Dennis, Latin American equity strategist at Salomon Smith Barney. "This market is going to go quite a bit higher."

Mexican stocks have steadily risen and the market is healthy, suggesting that share prices will continue upward, said Perl, of Morgan Stanley Dean Witter.

"If this were just a cyclical recovery,I would say Mexico has priced in the gains already," he said."The country has shown greater stability and a more democratic process."

The country's last boom time, 1993-94,and the subsequent recession is still fresh in the minds of many investors. Some worry that conditions now could spark an avalanche of speculative investments that will be withdrawn at the first sign of trouble.

But such a scenario isn't likely this time around, said Javier Murcio, director of Latin American economic research at Credit Suisse First Boston.

"The government has been diligent to prevent that kind of speculative investment taking place,"he said. "I think in general we are looking at a serious improvement in macroeconomic conditions."
    
Attractive to investors
    Many investors also are itching to get back into the country, said Newman, of Merrill Lynch.

"Mexico has always been the first stop when you're looking outside the country, in part because retail investors tend to be more receptive to the Mexico story,"he said. "I am sensing a renewed interest on the part of global players -- many that have not invested in Mexico since 1994."

For individual investors, there are several options. The most conservative option - and perhaps the least risky approach -- is mutual funds that target the entire emerging markets world, country-specific funds for Mexico or funds that hold assets in the entire Latin American region. Morgan Stanley Dean Witter's closed-end Latin American Discovery Fund, for example,has an overweighted position in Mexico - about 43 percent - and its top holding is Telephones de Mexico (Telmex), at 14.1 percent.

"In general, unless you can follow these markets day-to-day and understand who are the key players,it's better to go into a managed investment vehicle," Perl said.
    

    Investors also can choose the WEBS Index series of country-specific mutual funds, traded on the American Stock Exchange, for Mexico. This passively managed fund replicates the price performance of the blue-chip Mexican stock index .

Another option is investing in American depositary receipts (ADRs) of individual Mexican companies. Newman says areas poised for growth include telecom and other technology sectors as well as consumer goods, citing increased purchasing power and personal consumption due to increased real wages.
    

    By going the ADR route, investors can buy individual shares of companies, such as Telmex (TMX: Research,Estimates) or media firm Grupo Televisa  (TV: Research, Estimates),which are converted into dollar prices and traded on the New York Stock Exchange, although investors should keep in mind that these investments are not immune to currency risks.

Telmex ADRs, which recently split two-for-one,closed down 1-7/8 at 73-7/8 Friday. Salomon Smith Barney has raised its 12-month target on Telmex to $100, from $70.

Grupo Televisa closed down 9/16 at 80-1/2.Shares have risen from 26-15/16 a year ago to a recent lifetime high of 87.

Other Mexican companies traded in New York include ADRs of cement maker Cemex (CX: Research, Estimates),which slipped 3/4 to 26-1/4 Friday. The shares have traded from 19-1/4 to 28-3/4 over the past year. Another possibility is beverage company Femsa (KOF: Research, Estimates), which closed down 1/16 at 19-1/8 Friday and also is trading near 52-week highs. stories

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Mexico Stock Exchange
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