Headed North? : Some analysts say Mexican stocks may be ready to rally again as the country’s economic prospects improve.

After strong gains early this year, U.S.-listed shares of many Mexican companies have turned, well, south. But some analysts say conditions are ripe for the stocks to rally again.

The situation is easily grasped by looking at Mexico’s benchmark Bolsa index, which is up 14% for the year. But most of the advance came early; during the last three months, it’s fallen 4%.

The same holds for individual Mexican stocks, many of which trade on U.S. markets as “American depositary receipts,” or ADRs, representing a certain number of the company’s shares in Mexico.

Among the major U.S.-traded Mexican stocks, the financial services concern Grupo Financiero Serfin is up 11% for the year, despite losing 40% since May. Beverage giant Coca-Cola Femsa is up 44% for the year, yet down 19% since May.

One reason: further weakness in the battered Mexican peso relative to the U.S. dollar. At midyear it took about 7.5 pesos to buy a dollar, but today it takes nearly 8.

The peso’s decline reopened the psychological scars of many investors whose holdings of Mexican stocks were pummeled by the peso’s severe devaluation two years ago, analysts said. (Before that event, it took only 3 pesos to buy a dollar.)

“Investors are deathly afraid of being fooled again . . . and are not about to be left holding the bag again,” global equities analyst Robert Pelosky Jr. of Morgan Stanley & Co. wrote in a recent report.

That skittishness is also apparent in closed-end mutual funds that focus on Mexico. The Mexico Fund, Mexico Equity & Income Fund and the Emerging Mexico Fund have all turned lower in recent months, although they still enjoy year-to-date total returns of 12% to 16%--a vast improvement from their huge losses in 1994-95.

But Pelosky argued that the price declines present a good opportunity to buy the stocks because Mexico’s economic picture continues to get better. “The trade picture is enviable, as is the government’s budget picture,” and “inflation is coming down,” he said.

The sentiment was echoed by analyst Kathleen Stephansen of Donaldson, Lufkin & Jenrette Securities Corp., who noted in her own recent report that “economic conditions in Mexico improved decidedly this year.” Indications are that Mexico’s gross domestic product will expand between 4% and 4.5% in 1996, and it’s forecast that “the recovery will continue into next year at a 4% pace as well,” she said.

That improvement is why analyst John Mullin of Salomon Bros. is recommending two of Mexico’s major cement companies, Apasco (currently trading at about $33 per ADR) and Cemex (about $7.50).

“Both are attractively valued, [and] the government has budgeted quite a bit of infrastructure work for the next year,” Mullin said. The cement companies “can help the investor participate in the recovery we see going on in Mexico.”

Even the peso’s problems aren’t cause to ignore Mexican stocks, in good part because the declining peso continues to make Mexican exports more attractive, Stephansen said. As the peso weakens, foreign buyers have greater purchasing power to purchase Mexican goods with their stronger currencies.

That’s also why investors should give consideration to Mexican companies that have both domestic and overseas operations, analysts said. Example: industrial powerhouse Desc, whose holdings include chemicals, real estate, livestock and auto parts. Desc’s ADR, at a recent $21, is up 50% this year, and some analysts expect it to rise further.

To be sure, Mexican shares remain off-limits to the fainthearted. Inflation in Mexico this year is still expected to register a growth of 25% or so, though that’s down from 52% last year, Stephansen said. Government policies have yet to prove they can foster stable economic growth. Next year’s congressional elections in Mexico are expected to add to the stocks’ volatility. If high inflation continues in Mexico and does not return to the U.S., the peso remains vulnerable to falling further against the dollar.

Changing industrial rules are adding to the complexity, as in the case of Mexico’s most actively traded stock, Telefonos de Mexico, the giant telephone company nicknamed Telmex. A Wall Street darling in the early 1990s, Telmex’s ADR has never really recovered from the peso devaluation of December 1994, and it’s been one of Mexico’s disappointments in 1996.

Telmex’s ADR is currently trading at about $30.50 a share--compared with a peak of $76 in 1994--and the firm’s prospects for 1997 are mixed. The improving Mexican economy is a plus, because it should enable Telmex to connect more homes and businesses with its service.

But the market is changing: Next year Telmex will be obligated to connect local calls on its network to rivals’ long-distance lines, and that is likely to erode its market share, says analyst Robert Wheeler of the Value Line Investment Survey.

Staff writer James F. Peltz can be reached at james.peltz@latimes.com

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From Fiesta to Siesta?

U.S.-listed shares of many Mexican stocks have turned lower after a rally early this year. But the improving Mexican economy could spark another upturn, analysts say. A look at the Bolsa index, monthly closes and latest, as well as some of the U.S.-listed stocks:

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% Change from Stock Ticker Recent price June 30 Jan. 1 Telefonos de Mexico TMX $30.50 -9% - 3% Cemex CMXBY 7.25 -8 -5 Coca-Cola Femsa KOF 26.25 -8 +44 Grupo Financiero Serfin SFN 3.75 -27 +11 Standard & Poor’s 500 +8 +18

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Source: Bloomberg Business News