Markets Take a Pounding : IN MEXICO CITY : Perot, Telmex Jitters Spur a 6% Decline

Mexico’s stock market plunged 6% Wednesday--its biggest drop in nearly three years--primarily because of worries that the market has become saturated with its premier issue, Telefonos de Mexico, or Telmex.

Investors were also worried that undeclared U.S. presidential candidate Ross Perot’s opposition to the proposed North American free trade agreement could doom the pact, making it more difficult for Mexican companies to expand to new markets.

The Mexico stock exchange’s Bolsa index dropped 99.65 points to 1,593.29 on Wednesday, bringing its decline since Monday to 12%. By midday Wednesday, the market had fallen to 9.63% below Tuesday’s close, but then edged slightly upward. Analysts attributed the rebound to a combination of bargain-hunting by institutional investors and intervention by Nacional Financiera, the national development bank, which acts as a market maker in several major stocks.

Manuel Robleda Gonzalez de Castilla, president of the Mexican stock exchange, blamed Wednesday’s drop on “unfavorable economic and political developments in the major industrial countries that have also had repercussions in their own stock exchanges.”

However, analysts said the drop in international markets contributed only marginally to the Bolsa’s fall--an event they had for months warned was coming because of several factors:

* Investors’ desire to take profits after a three-year boom.

* The volatility of the Mexican stock exchange and its dependence on a single issue, Telmex, the telephone company.

* The threat of saturation for Mexican stocks on international markets as the number of issues traded worldwide has risen to 27 from four only three years ago.

“It just needed a trigger,” said one portfolio manager who, like most of the investors interviewed, spoke on condition he would not be identified.

That trigger was last week’s rumor that the telephone workers’ union planned to distribute its 2.9% of Telmex stock among individual members, who might sell, further weakening prices. At the same time, Salomon Bros. issued a report expressing concern that earnings of Telmex, which accounts for more than half of the Mexican market, won’t increase as rapidly as they have in the past.

Small foreign investors, most of whom had acquired the stock in the latest offering of government-owned shares, got nervous and began selling last week. Wednesday, after the market fell 6.5% in the first two days of this week, they were joined by domestic traders in a selling spree one investor called “a free fall.”

The usually genteel Mexican trading floor was filled with shouting traders who became only slightly more calm as the index began to rise.

“It is a small market, and if everybody tries to get out at once, this is what happens,” a U.S. investor said. “Telmex created a snowball and the rest of the market ratcheted down. As soon as Telmex stabilizes, the rest will recover.”

“The market overreacted,” said Pablo Mancera, a Mexico City-based member of the management team for the Emerging Mexico Fund, a fund of Mexican stocks traded on the New York Stock Exchange. “This is still an emerging market. It is volatile and can be affected by external variables. Perot’s popularity and his saying he would not sign the North American free trade agreement is one of them. The free trade agreement is more important for Mexico than it is for the United States.”

The weakened market is expected to decrease the attractiveness of new Mexican issues now being offered on international exchanges

International markets are already suffering from what one analyst called “boa constrictor syndrome” on Mexican stocks: inability to digest the large number of offerings placed in a short period of time.

The Mexican government had difficulty finding buyers for the latest Telmex offering among institutional investors in foreign markets, which is why it was sold to small investors. Other new offerings, notably Banamex-Accival, the country’s largest financial group, are also having trouble.

“The price is already under what they wanted to go out at,” a Mexican institutional investor said.

U.S. institutional investors said they expect a recovery in Mexico within two or three weeks unless there is a serious decline in the U.S. markets. Meanwhile, they are taking advantage of the current bear market to add to their Mexican portfolios.

“When I can buy Telmex at $43 and Televisa at $40, that’s a bargain,” one pension fund manager said. “What a great opportunity! On days like today, we can really get large volumes through” the exchange. The small blocks of stock normally traded on the Mexican market are inconvenient for U.S. institutional investors, who prefer to deal in larger volumes.

“I did not expect to see these kinds of bargains in Mexico,” said another investor, who is buying stocks of cement companies and retailers, specifically Cifra, which is also listed on U.S. markets.

Investors and analysts agreed with Robleda that Mexico’s economy remains stable and that there are no internal factors that would prevent a market recovery.

Heading Down

The Japanese, American and Mexican stock markets have weakened dramatically in recent weeks as investor confidence has waned, leading some analysts to worry that stocks are forecasting a new global recession.

TOKYO

Bear Market Resumes

Nikkei Stock Index Wednesday: 16,445.8

UNITED STATES

Dow Fading Fast

Dow Jones Industrials Wednesday: 3,287.76

MEXICO

Major Crash Unfolds

Bolsa price index Wednesday: 1,593.29

* MAIN STORY: A1