FINANCIAL MARKETS : Mexican Stocks Hit 4-Month High on Expectations of More Growth

Pushing aside a year of inflation, civil unrest and political uncertainty, Mexican stocks rallied Tuesday to four-month highs amid expectations that the nation’s ruling party will remain in power and economic growth will increase after this month’s presidential elections.

The Bolsa index jumped 64.98, or 2.63%, to close at 2538.52, its highest level since reaching 2,543.57 on March 23.

Mexican stocks haven’t exactly been glamour pusses lately. For most of this year, volume and excitement have been in short supply. The Bolsa index at first sputtered, then dropped dramatically as guerrillas fought army troops in the southeastern state of Chiapas. The index fell again when presidential candidate Luis Donaldo Colosio was assassinated March 23.

As world confidence in the country’s ability to pull itself together waned, the Bolsa hit a low of 1,957.33 on April 20.

Over the past two weeks, however, signs of solid economic growth and good corporate earnings reports have sparked a lively rally. Early last month, Mexico’s stock market was down about 15% in U.S. dollar terms since Jan. 1. Now the index is down 10.38% in dollar terms and just 2.47% in local currency terms for the year.

The recent spike got its start July 20, after a Louis Harris poll reported that 50% of the electorate preferred Ernesto Zedillo, the presidential candidate of the PRI, or Institutional Revolutionary Party. A PRI victory in the Aug. 21 election would ensure continued economic reforms and growth in corporate profits, analysts and traders said.

“Everybody thinks: ‘Zedillo will win. There will be 5% economic growth in 1995. The peso will not be devalued. There will be no social instability. So let’s buy,’ ” said Herman Von Bertrab, director of research at InverWorld in San Antonio.

But Von Bertrab said the rise in Mexico stocks “is overdone. The fundamentals in Mexico have not changed.” He said his firm is selling stocks.

“Zedillo will win. That’s almost certain,” Von Bertrab said, but higher interest rates in the United States could easily put a damper on the Mexican market.

Share prices were pushed higher in part because yields on dollar-indexed government bonds fell an average of 20 basis points in this week’s auction of government debt, Von Bertrab said.

Lower rates reduce the cost of borrowing, which can help boost company profits, making stocks more valuable. Rates began to decline last week as investors expressed confidence that the free-market economic policies of President Carlos Salinas de Gortari will remain in effect until 2000.

“My premise was that Mexico wasn’t going to see good growth until interest rates go down,” said Kelly McDermott, a global fund portfolio manager at Dreyfus Corp.

Whether an economic recovery can be sustained will depend on whether the victor in the presidential elections can keep interest rates down, McDermott said.

Salomon Bros. said in a recent research report that the Bolsa index could rise above 3,000 by the end of the year if there is 2.7% economic growth and a further drop in interest rates from the current 17.5%.

Carlos Fritsch, head of Latin American research at S.G. Warburg, is predicting an increase to 2,900 by year’s end.

Some analysts anticipated the Tuesday’s rally. “Mexico currently trades at 12 times estimated 1995 earnings and is one of the world’s cheapest markets,” Morgan Stanley’s Robert J. Pelosky Jr. wrote in a July 14 research report. “I don’t think it will stay that way much longer.”

Mexican stocks first got a boost last month when the government reported unexpectedly healthy growth in second-quarter gross domestic product.

Then several large Mexican companies reported solid earnings growth, Telefonos de Mexico and Grupo Carso, an industrial conglomerate, among them.

On Tuesday, American depositary receipts of Telefonos de Mexico, worth 26% of the Bolsa index and a benchmark for the Mexican market, advanced 2% to $62.625, their highest price since June 7.