From the June 2011 issue of Research Magazine • Subscribe!

Mexico’s Resilient Market

The Mexican stock market has a history of overcoming economic and financial crises.

Mexico’s long-ago president, José Porfirio Díaz, is credited with a memorable, though likely apocryphal, quote, which translates as: “Poor Mexico, so far from God and so close to the United States!”

Díaz, who as a youth fought against the U.S. in the Mexican-American War, was overthrown in the 1911 Mexican Revolution, but his desire to keep some distance from the giant northern neighbor echoed through the 20th century in Mexican policies that kept a tight rein on cross-border trade and investment.

In recent decades, though, and particularly since the North American Free Trade Agreement went into effect in 1994, Mexico’s policymakers have sought to capitalize on their country’s proximity to the U.S. Consequently, Mexico has attracted investor interest for its uncommon identity as both emerging market and member of a vast trade bloc.

The nation’s transformed status enabled Mexico’s equity market to weather a currency crisis in 1994 and a malaise that beset emerging markets generally in the late 1990s. Moreover, in recent years, Mexico’s market has soared to unprecedented heights, notwithstanding a significant but transient plunge during the global financial crisis.

The benchmark IPC index, which at the start of 2000 was slightly above 7,000, hit a peak of 31,975 in May 2008 before falling to 19,626 in May 2009. As of December 2009, it was above its pre-crisis peak. At the end of 2010 the IPC hit an all-time high of 38,550 before retreating mildly into the vicinity of 37,000 in the second quarter of 2011.
Goldman Sachs has labeled Mexico one of the N-11, a group of 11 nations poised to follow the four BRICs of Brazil, Russia, India and China in taking on expanded roles in the world economy. Mexico, along with South Korea, is a more developed economy than the bulk of the N-11, a diverse set that includes frontier markets such as Nigeria and Bangladesh, and yet Mexico is included in the grouping for its high growth potential.

Indeed, some projections have placed Mexico as the world’s fifth largest economy in 2050, compared to its current position narrowly missing the top 10. This would put Mexico behind China, the U.S., India and Brazil and ahead of Russia. Mexico may not be a BRIC — though Mexican officials have been known to grumble that the category should be called BRICMs — but it is set to carry significant weight whatever the label.

Notably, such optimism about growth is occurring amid a spate of grim news from Mexico about escalating violence by drug cartels. Such violence, while it holds potential to damage tourism revenues, has had little impact thus far in dampening investor enthusiasm. As in the past, Mexico’s market is showing considerable resilience.

Building a Bloc

Negotiations toward a North American free-trade zone began in the mid-1980s. On Dec. 17, 1992, NAFTA was signed at a ceremony in San Antonio, Texas by President George H.W. Bush, Mexican President Carlos Salinas de Gortari and Canadian Prime Minister Brian Mulroney. After a contentious debate in the U.S., the pact was ratified by legislation signed by President Bill Clinton on Dec. 8, 1993.

Mexican equities moved upward steadily in anticipation of closer North American links. The IPC, which opened 1992 at 1,444, closed that year at 1,759 and ended 1993 at 2,603. In May 1994, Mexico joined the Organization for Economic Cooperation and Development, becoming the OECD’s first Latin American member and crossing the threshold before other mid-1990s entrants such as South Korea and Poland.

In December 1994, the Mexican peso was devalued sharply amid panic about factors ranging from current-account and budget deficits and lending standards to the leftist insurgency in the state of Chiapas. The IPC closed the year at 2,373, and it traded below the 2,000 level during much of the first half of 1995. A U.S.-led international package of loans and guarantees helped stabilize Mexico’s economy, preparing the way for renewed growth in 1996. The IPC ended 1995 at 2,778 and was at 3,361 at end-1996.

The late 1990s were a time of cautious but generally upward movement in Mexico’s equity market. The IPC made its first push above the 5,000 line in August 1997. The 7,000 mark was hit on Dec. 28, 1999, the third-from-last trading day of the decade.

Millennial Ascent

A vigorous Mexican bull market began in mid-2003. The IPC, which hovered around the 7,000 level in June of that year, closed 2003 at 8,795. Then the bull’s pace picked up. The IPC made its first push above 10,000 in February 2004 and by year-end was at 12,917. The 15,000 mark was hit in September 2005. The IPC crossed the 20,000 line for the first time in April 2006 and ended that year at 26,448.

The IPC first closed above the 30,000 line on May 11, 2007. It fluctuated around that line for the rest of 2007, closing the year at 29,536. The index poked above the 32,000 line briefly in April 2008, but in subsequent months was caught in the downdrafts of the global financial crisis. The IPC fell below 25,000 that September and below 20,000 the following month, briefly dipping below the 17,000 mark in October’s last week.

The IPC ended 2008 at 22,380 and at end-March 2009 was back below 20,000. But the resilience of Mexico’s market became increasingly evident. In early October 2009, less than a year after its low point, the IPC pushed back above the 30,000 line. The index ended 2009 at 32,120.

In the decade and a half since the peso crisis, Mexico had tended toward fiscal restraint in its macroeconomic policies and cautious lending standards in its banking system. Both now paid off in bolstering investor confidence amid worldwide financial jitters. The nation also was well-positioned to withstand dropping oil prices; unlike fellow energy exporters Venezuela and Russia, Mexico had not poured its oil revenues into an unsustainable spending spree.

So Close to the U.S.

The earlier-mentioned Porfirio Díaz-attributed quote appears to be a poor guide to Mexico’s situation in the early 21st century. The country’s proximity to the U.S. now is a selling point that helps draw investors into Mexico’s stock market. Mexico’s ready access to its giant neighbor as an export market is a major reason for this.
Ironically, though, growing concerns about U.S. public finances may also increase Mexico’s attractiveness.

Mexico’s public debt recently has stood at a little over 40 percent of GDP, compared to a U.S. equivalent of nearly 60 percent. When Standard & Poor’s shifted to a negative outlook on U.S. debt in April, Mexican financial markets took it in stride, as analysts noted the contrast with Mexico’s own strong fiscal position.

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A Long Development

Mexican equity trading dates back to 1886 with the establishment of the Bolsa Mercantil de México (Mexican Mercantile Exchange) in Mexico City. In 1975, this organization changed its name to the Bolsa Mexicana de Valores (Mexican Stock Exchange), acquiring regional exchanges in Monterrey and Guadalajara at the same time.

A modernized version of the institution was launched in 1933, and a regulatory liberalization in the 1980s enabled trading to expand. Today, the organization, often referred to by the initials BMV, is Latin America’s second largest stock exchange, after Brazil’s BM&F Bovespa. Long owned by a group of banks and brokerage firms, BMV became a publicly traded company in 2008.

Since 1996, investing in Mexico through an exchange-traded fund has been possible with the iShares MSCI Mexico Investable Market Index Fund (symbol: EWW). It remains the only pure-play Mexico ETF.

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Extremely High-Net-Worth

During the past two years, Forbes has ranked Mexican tycoon Carlos Slim Helú as the world’s richest person. Slim, 71, is the chairman of telecom companies Telmex and América Móvil and his Grupo Carso holding company has stakes in various industries. In March 2011, Forbes estimated the net worth of Slim and his family at $74 billion.

In 2009, Slim provided a $250 million loan to the cash-strapped New York Times. The infusion came in the form of notes that carried a high 14 percent interest rate. In late 2010, the Times announced an intention to repay the loan in 2012, three years early.

As a child, Slim learned business practices from his father, an immigrant from Lebanon who had founded a dry-goods store. At age 12, the future billionaire bought shares in a Mexican bank. His early business interests focused on construction, mining and real estate, but by the 1980s he was involved in industries ranging from aluminum to chocolate.

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