Confidence Crisis Slows Mexico Stock Market Recovery

Car dealer Alejandro Espinosa was examining an investment brochure at the close of business one day recently when he spotted a page that displayed the 12-month performance of the Mexican stock market.

He focused on a bar graph that resembled a silhouette of the Empire State Building next to a row of tiny houses, and suddenly his mood turned sour.

“A year ago this time, I was a rich man,” Espinosa, 36, remarked. Then came October and, Espinosa said, “I lost 70% of my investment. I don’t know if I could trust (the market) so far again.”

While the New York Stock Exchange has recovered some of its losses since the crash, sparking hopes for a return to business as usual, the volatile Mexican stock market faces a continuing crisis of confidence almost 10 months after Black Monday, Oct. 19.

Tens of thousands of investors have abandoned what was once the world’s best-performing exchange; allegations of financial irregularities have cast a pall over trading, and some analysts fear that a government anti-inflation measure may jeopardize any market recovery before the end of the year.

“I think it’s going to be a very difficult year, with a strong possibility of recession,” said Alejandro Barrios, manager of mutual funds at the investment firm of Casa de Bolsa Cremi. “The market is very volatile, very nervous.”

The Bolsa de Valores, as the Mexico City stock exchange is called, has never had a reputation for shadowing the world financial community, or even private enterprise in Mexico. The market has moved up and down, seemingly “independent of such things as corporate profits, inflation or debt,” said one U.S. banker here who did not wish to be identified.

Since the mid-1970s, the Bolsa has been a key force in attracting capital to finance business expansion in Mexico, which had traditionally been funded by bank lending.

The Bolsa’s stock index soared 692% during the first nine months of last year, the most spectacular performance of any major market in the world. But when bull markets turned to bears all around the globe last October, Mexico’s exchange led the tailspin.

By the end of the year its index had fallen to 105,670 from a peak of 373,216 on Oct. 6. The index currently hovers around 190,000.

Car dealer Espinosa said his 17,000 shares of stock are now trading at less than half their October value. Still, he acknowledged, the damage could have been worse.

“Lots of my friends sold their houses or borrowed money to get into the market,” he said. “Some of them lost everything.”

Of course, many investors on other exchanges suffered losses. What’s more, even with the dramatic loss last October, the Bolsa’s 76.6% overall gain between Dec. 30, 1987, and June 30, 1988, exceeds other common investments such as bank certificates of deposit and gold, said InverMexico, an investment house.

Still, on few exchanges was the exodus from the market as widespread as it was in Mexico.

Mexican brokerage firms suffered a net loss of about 65,000 clients between October and January, according to the Mexican Society of Brokers. And few firms report gaining substantial new business since then.

The loss is substantial for Mexico’s only exchange, which has only about 375,000 individual investors. By comparison, an estimated 50 million Americans invest in U.S. stocks.

The Bolsa’s most daunting long-term obstacle, however, may not be pessimistic investors but investigations of the securities industry and a 7-month-old anti-inflation pact among government, labor and industry.

Experts say that the anti-inflation agreement, called the Economic Solidarity Pact, will likely prevent a quick market recovery because it has tightened credit and cooled Mexico’s overheated economy. Late Sunday, it was announced that the government, labor and business had agreed to extend the agreement until Nov. 30.

Aimed at reducing inflation from the triple-digit levels of 1987, the pact calls on labor to forgo wage increases and asks industry not to raise prices. In return, the government promises to maintain present fees for public services like transportation, electricity and communications.

“The pact is very positive” for the economy, said Manuel Gomez Palestino, research director for Operadora de Bolsa, the largest brokerage firm in Mexico. “All (the parties) agreed to fight inflation and in seven months they have seen results,” he said.

Gomez said the improvement will pay off for investors in time. But for now, he said, “the pact is recessive for brokerage houses and, at the very least, has reduced demand” for stocks.

Two Probes

“The progress of the pact is affecting the Bolsa,” Barrios agreed. “Performance is not going to be very good for the near future.”

There is less certainty about the outcome of two embarrassing investigations--one focusing on the Bolsa itself and another on individual brokers.

On June 21, for example, Bolsa officials announced that a financial audit of the exchange turned up “administrative irregularities” and about $6.6 million missing.

Bolsa President Alfredo Harp Helu pledged to investigate. But a key figure in the probe, the exchange’s director of operations, has been in a coma since allegedly attempting suicide in May.

The director’s condition, Harp said, “has prevented (us) from completely explaining the origin of this problem.” A spokesman for the Bolsa would not comment on the status of the investigation but said the financial loss was covered by insurance and other sources.

More recently, the Mexican government’s National Securities Commission has been investigating possible violations of securities laws by some brokerage firms. Among other alleged infractions, investigators say they are probing investors’ complaints that brokers violated established procedures by failing to buy stocks in a timely fashion after the purchases had been ordered by clients.

Mexican journalist Antonio Zuniga explored the issue of unethical brokers in a book last year that argued that the rise and fall of the Bolsa was a carefully orchestrated plan by 300 ex-bankers, business executives and government officials who profited from their manipulations of the market. Officials in brokerage houses here, however, term Zuniga’s charges “unsubstantiated.”

Few Understand Bolsa

A high-ranking official of the commission, who declined to be identified because he said he is “not authorized to speak” publicly about the investigation, said the Mexican press has “sensationalized” the investigation. He added that, since few Mexicans are knowledgeable about the stock market, the numerous articles about possible stock fraud could hurt the market’s image.

Indeed, a 1986 Gallup-Mexico poll found that only 1% of those surveyed--both investors and noninvestors--had an “adequate knowledge” of how the Bolsa works. Of the remaining 99%, slightly over half had “some knowledge” and the remainder had virtually none.

Yet even some sophisticated investors now feel they did not know quite enough about just how volatile the stock market can be.

“I think right now I would rather buy gold or some property,” said Espinosa, the car dealer. “I don’t think people want to buy shares now. They don’t now what the market might do.”