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Bonds Top Mexican Stocks by Most Since 2005 on Record Consumer Price Drop
email this pageprint this pageemail usAndres R. Martinez & Jonathan Roeder - Bloomberg
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July 22, 2010

JPMorgan equity strategists cut Mexican stocks to 'neutral' from 'overweight' last week, saying the economy will be hurt by the stalling U.S. recovery.
Mexico’s government bonds are beating stocks by the most in at least five years amid a record decline in consumer prices and concern economic growth will slow in the U.S., the nation’s biggest export market.

An index of Mexican government debt has climbed 11 percent this year, compared with a 0.6 percent gain for the IPC stock index over the same period. The difference is the biggest since at least 2005, according to data compiled by Bloomberg.

Yields on Mexico’s benchmark 10 percent bonds due in 2024 will extend their decline to an all-time low after inflation fell to within the central bank’s target range the past two months, said Gabriel Casillas, chief Mexico economist for JPMorgan Chase & Co. in Mexico City. JPMorgan equity strategists cut Mexican stocks to “neutral” from “overweight” last week, saying the economy will be hurt by the stalling U.S. recovery.

“Investors are looking for good returns, in markets with low risk and high liquidity,” Casillas said. “It’s very difficult to find those three factors right now somewhere other than Mexico bonds.”

A reduction in consumer spending in the U.S., the buyer of 80 percent of Mexico’s exports, is sparking concern among analysts that growth in earnings and shares will falter. Sales at U.S. retailers slid for a second month in June, manufacturing contracted by the most in a year and housing starts fell to the lowest level since October, signs the economic expansion is weakening.

Rate Forecasts

“If it’s worse than expected, obviously there would be repercussions in certain industries in Mexico,” said Rogelio Gallegos, who manages $500 million of stocks at Corp. Actinver SAB in Mexico City.

Mexico’s central bank will leave its main interest rate unchanged until April 2011 to keep the economic rebound from stalling, according to the median estimate of analysts in a July 20 survey by Citigroup Inc.’s Banamex unit. That’s higher than a range of zero to 0.25 percent in the U.S., 1 percent in the euro region and 0.1 percent in Japan. Mexican consumer prices dropped for a third month in June, the longest streak since at least 1973, data compiled by Bloomberg show.

Investors will buy more Mexican bonds in anticipation of their addition to Citigroup’s World Government Bond Index in October, Casillas said. Inclusion in the measure, which would require fund managers tracking it to buy the bonds, may lure funds to Mexican debt, he said.

Bond Yields

Mexico’s benchmark bond yield has dropped 146 basis points, or 1.46 percentage points, to 6.81 percent this year and will fall to 6.5 percent by January, Alonso Madero, who helps manage about 66 billion pesos ($5.1 billion) at Actinver, said in a July 7 interview. The yield fell four basis points, or 0.04 percentage point, at 11:44 a.m. New York time today, according to Banco Santander SA. The price of the security rose 0.42 centavo to 129.17 centavos per peso today.

“The Mexican equity market lacks a driver, while the debt market keeps luring international investors,” Arnulfo Rodriguez, head of fixed income at Banamex, said in a telephone interview on July 12. “Foreigners are still pouring money in the long and medium part of the curve.”

While the IPC index has underperformed bonds this year, it has beaten the 3.8 percent drop for Brazil’s benchmark Bovespa index. The IPC index trades at 16 times reported earnings, compared with 13 times for the Bovespa, the biggest premium in more than a year, according to weekly data compiled by Bloomberg. Brazil’s economy will grow 6.6 percent this year, more than the 4.4 percent expansion in Mexico, according to the median estimates of economists surveyed by Bloomberg.


The IPC index rose 0.8 percent to 32,348.41 today, while the Bovespa gained 2.3 percent to 65,985.43.

“It will be significantly more difficult for Mexico to outperform,” Matthew Hickman, head of Latin America research for Citigroup, wrote in a research report on July 12. He cut his rating on Mexican stocks to “underweight” from “overweight,” citing valuations and concern the U.S. recovery will flounder. “With leading indicators rolling over in the U.S., exports to the U.S. will slow, and there is no sign of the Mexican consumer taking up the slack,” he said.

An e-mail and two phone messages left for Hickman seeking comment were not returned.

Earnings Growth

Citigroup forecasts the IPC index will climb to 35,000 by year-end, a 9 percent gain from yesterday’s close.

JPMorgan Chase & Co. also cut its rating on Mexican stocks, to “neutral” from “overweight,” according to a July 15 report by analysts including Ben Laidler, who cited the weakening U.S. recovery. An e-mail and phone message for Laidler seeking comment were not returned.

Urban Larson, who helps manage $2 billion in emerging- market stocks for F&C Management Ltd. in London, said he is overweight Mexican shares and predicted they will rally.

“There are some more cyclical stocks in that index and they should see an acceleration of earnings growth in the second half,” Larson said.

Economists have raised forecasts for Mexican growth on speculation the nation’s manufacturers will benefit from revived U.S. demand for goods from refrigerators to cars, boosting Mexican employment, incomes and consumption. Mexico’s gross domestic product will expand 4.4 percent this year, up from a 3.3 percent projection in January, as it recovers from the deepest recession since 1932, according to the average estimate of economists in a Banco de Mexico survey published July 1.

That outlook would be threatened should U.S. spending continue to slow, Actinver’s Gallegos said. Actinver forecasts the IPC index will climb 12 percent from yesterday’s close to 36,000 by year-end.

“We’ve recommended to clients they be more conservative with their portfolios and their positions,” he said.

To contact the reporter on this story: Andres R. Martinez in Mexico City at amartinez28(at)

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the included information for research and educational purposes • m3 © 2009 BanderasNews ® all rights reserved • carpe aestus