Foreign Investors Fueling Run-Up on Mexican Exchange

If the recent meteoric rise in U.S. stock markets seems impressive, take a look at stocks south of the border.

From out of the swamp of otherwise bad economic news here, the price of shares on the Mexico City Stock Exchange rose by an average of 70% in January and February--in terms of dollars, not in the deteriorating Mexican peso. This followed a remarkable run-up last year that saw the value of stocks double.

By comparison, the New York Stock Exchange seems anemic. Last year, the Dow Jones industrial index rose 22.6% and added slightly more than 17% in the first two months of 1987. Since the current bull market began in 1982, the Dow index has nearly tripled.

However, stocks traded on the Mexico City exchange have increased tenfold, in dollar terms, during the past four years, making it the best-performing market in the world for the period.

But before calling your broker and moving to Acapulco, beware. The Mexico City market is extremely volatile. In just two days recently, prices fell an average of 10%. Brokers in Mexico City blandly referred to this as a correction. In New York, it would have been closer to a panic.

The positive performance of the Mexican market seems paradoxical, coming in the midst of a deep recession, high inflation, high unemployment and a generalized lack of confidence in the economic future. What does the bull market mean as a measure of the Mexican economy’s strength?

Not much, many analysts say, except that there is a lot of money around and few profitable places to put it.

Smart Investments

For one thing, the Mexico City Stock Exchange is a small market. Trading involves the shares of only 100 to 120 companies; daily volume is about 30 million shares, and the highest-priced stock sells for about $14. This compares to the New York Stock Exchange’s 1,800 issues and daily average volume of well over 100 million shares, and a much greater dollar value.

“One cannot call the stock market here a barometer of the economy,” financial columnist Patricia Nelson said. “It’s just some smart people making investments.”

Meager trading on the Mexico City exchange means that a relatively few transactions can move prices considerably--up or down. Such volatility has led to suspicions that the Bolsa, as the exchange here is called, is easily manipulated by a few investors.

Scandals in the 1960s and 1970s led to a reorganization of the Bolsa and tighter controls, but that has not erased suspicions that American inside trader Ivan F. Boesky would feel right at home here.

In the 13 years since new laws governing the market went into effect, four brokerages have been shut down for investing money without their clients’ authorization in stocks the buyer did not want.

Two of Mexico’s government-owned banks recently issued stock to be sold to employees at a bargain price. Reports circulated that brokerage houses had obtained some of the shares and were withholding them from the market hoping to drive up the price. Thousands of dollars were made in a matter of days as buyers scrambled for the scarce shares.

The government defended the low price of the offering by saying it was needed to ensure that employees bought the shares. The volume made available to brokerages was minimal, officials said.

“There are still some abuses,” said Lorenzo Peon Escalante, president of the government agency that regulates the market. “But we are slowly instituting quality.”

In any event, the rapid rise in stock prices here appears to indicate a movement of money into Mexico from abroad. Last year, Mexican citizens repatriated between $1.5 billion and $3 billion, analysts say, reflecting a flight from diminishing returns on investments in bank accounts and real estate in the United States.

“Houses in Texas don’t look like such a good deal,” said Sidney Wise, publisher of an investment newsletter in Mexico City. “Neither do certificates of deposit at 6% interest. In comparison, the (Mexican) stock market looks pretty good.”

There have been plenty of bargains available on the Bolsa. After a crash five years ago, shares in many enterprises could be bought for a fraction of their value. For example, shares in a silver mining company could be had for a third of the value of the company’s assets, including the silver in the ground.

Even with the long bull market, shares in many companies are still selling below book value (assets minus liabilities), although the gap in most cases is narrow. The index of Mexico City stocks has recently reached 1981 levels but has not yet regained the peak levels of 1979.

‘Loss of Fear’

The 1982 crash was caused in part by the government’s nationalizing the banks, a move that frightened Mexican capitalists and prompted many to pull their money out of the Bolsa and out of the country. But the memory of the bank shock appears to have faded somewhat, brokers say.

“Technically, there is no reason for the market to move upward,” said Pablo Legorreta, a broker with Operadora de Bolsa, Mexico’s largest brokerage house. “It has to do with some loss of fear.”

As for 1987, some analysts say that a combination of inflationary government policies and a sudden flow of funds from abroad may push the market even higher.

Late last year, the government printed millions of pesos in an effort to cover budget deficits. The increased money supply set off a rate of inflation that nearly outstripped potential earnings on bank deposits and, as a result, investors are looking for somewhere else to put their money. The Bolsa, with its bargain-basement stocks, is a logical place.

The Mexico City exchange may also benefit from billions of dollars in foreign loans expected to begin arriving in the country this spring. Along with the return of dollars from abroad and possibly stronger prices for oil, the main export, the foreign loans could make Mexico flush with cash.

With more cash available in banks, interest rates should come down, further stimulating investment in the Bolsa, even though Mexico’s economic growth is expected to measure not more than 2% or 3% a year.

“This will be a boom borrowed from abroad,” said economist Rogelio Ramirez de la O, who is bullish on the Bolsa.