Mexico’s Stocks Surging Toward Election Day

Until recently, analysts feared that in the period before crucial midterm elections, Mexico’s financial markets would resemble a gut-wrenching disaster movie. After all, elections in the last few years have meant turmoil, and the ruling party seems headed for defeat.

But with election day looming Sunday, the markets are now looking more like “Hercules” than “Twister.”

The stock market has soared by a third this year--about 15% in the last six weeks alone. The key market index, the Bolsa, has been setting records almost daily, including Wednesday, when it rose 1.1% to close at 4,559.23.

“We’re seeing a postelection rally taking place before the election,” exulted Gray Newman, chief economist at HSBC James Capel Research Mexico.

The reason? After a lull early in the year, foreign investors are rediscovering Mexico.

In addition to continued economic rebound, analysts reason, Mexico’s increasing democracy should eventually stabilize the economy--even though it could hurt the Institutional Revolutionary Party (PRI), the darling of investors for its free-market policies.

“What you want, longer-term, is the modernization of the political system, even though you might get some fallout short-term,” said Eduardo Cabrera, chief Latin American strategist at Merrill Lynch & Co.

Voters will renew the lower house of Congress and choose scores of state and local officials in Sunday’s balloting, expected to be the fairest ever in a country with a long history of election fraud.

The voting could dramatically change the way Mexico is governed. For almost seven decades, the PRI has controlled the presidency and Congress. But according to polls, neither the PRI nor the two major opposition parties--one conservative, one left-wing--is likely to dominate the lower chamber. That means Congress will no longer rubber-stamp the president’s budget or other initiatives.

An unprecedented opposition victory is also expected in the race for the powerful job of Mexico City mayor. The big favorite, according to polls, is populist Cuauhtemoc Cardenas of the Democratic Revolution Party (PRD). A win would position the left-wing candidate for a run for the presidency in 2000.

The apparent erosion of the PRI’s support and the surprisingly strong support for Cardenas have unnerved some Mexican investors and executives.

Some have reportedly been spiriting their money out of the country, although not in quantities sufficient to hurt the peso or prompt a capital-flight crisis.

Last month, the head of Mexico’s powerful bankers association publicly attacked the PRD’s economic policies, touching off a furor.

“Without a doubt, the application of the PRD’s economic program would cause a much worse crisis than we had in 1995,” said banker Antonio del Valle.

The PRD has called for a renegotiation of Mexico’s foreign debt, a tax on short-term foreign investments and less independence for the inflation-fighting central bank. All are anathema to investors.

Still, no one expects the PRD to win control of Congress. Polls indicate it will be the No. 3 force in the lower chamber, behind the PRI and the conservative, pro-business National Action Party (PAN). And despite Cardenas’ popularity, the Mexico City mayor doesn’t have a role in national economic decisions.

“Local investors in Mexico have, in some respects, panicked over the local elections,” said Cabrera. “Foreign investors are taking a much longer view.”

There is plenty for them to be optimistic about. Mexico’s economic growth is strong, inflation has shrunk to less than 1% a month, international reserves have doubled this year and the peso has been stable.

Perhaps most critically, consumer spending finally appears to be picking up more than two years after the peso collapsed. That’s important to investors because many companies listed on the Mexican stock market depend on consumers--from telephone giant Telmex to discount chain Cifra.

Mexico is also benefiting from a sense that other emerging markets, particularly Brazil, have topped out for the moment. Investment funds are searching for places to put their money, and no one wants to miss a rally. As one fund manager put it, “There’s always a risk things could go well in Mexico.”

Not that it will be a smooth ride. With the race for Congress expected to be close, candidates could contest the results, perhaps leaving the outcome uncertain for weeks. Meanwhile, if the U.S. Federal Reserve Board raises interest rates, investors could move their money back to the United States.

The biggest unknown is how Mexico’s transition from an authoritarian, one-party system to one of democracy will unfold.

“There are no market participants who can remember what a non-PRI Mexico is like,” said economist Newman. “People are trying to assimilate it.”

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

The Booming Bolsa

Despite the approach of this weekend’s midterm elections, Mexico’s stock market is on a tear. But even with the record highs in peso terms, foreigners who paid peak prices before the 1994 devaluation are still underwater. End-of-quarter figures and latest for the Bolsa index:

Wednesday: 4,559.23

Source: Bloomberg News