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MARKET BEAT / TOM PETRUNO

Turmoil Keeps Money Out of Mexican Stocks

March 21, 1994|TOM PETRUNO

Thomas Herzfeld believes the time to buy into so-called emerging stock markets is when they're down, especially on political upheaval.

But the Miami-based money manager still doesn't want to buy Mexico, despite that stock market's steep plunge this year tied to the ballooning problems of Mexico's ruling party, the PRI.

In fact, Herzfeld isn't enamored of any of the Latin American markets that have tumbled since mid-February, including Chile and Argentina.

"I think we'll have a chance to buy them cheaper later," he says. "There's nothing really compelling about them now."

Adam Holiber, analyst at D.A. Campbell Co., a Los Angeles brokerage that specializes in Latin American stocks, says the Mexican market's slide in particular has "all the characteristics of a panic" that hasn't run its course.

The Mexican Stock Exchange's Bolsa index, which eased 13.66 points on Friday to 2,363.01, has plummeted 18% from its all-time high of 2,881.17 on Feb. 8.

The market was able to overcome the initial surprise of the anti-government uprising in Mexico's southern Chiapas state in early January. But by mid-February, foreign investors began to focus on the severity of the Chiapas crisis' political fallout for the PRI and outgoing President Carlos Salinas de Gortari.

The biggest aftershock from Chiapas: Manuel Camacho Solis, whom Salinas named to negotiate for the government with the rebels, is considering entering this year's presidential race on the ticket of one of Mexico's smaller political parties.

That would be a direct challenge to the supremacy of the PRI, whose handpicked candidate to succeed Salinas is 43-year-old Luis Donaldo Colosio.

For foreign investors who since fall have focused only on what's right with Mexico--especially the long-term economic promise born of the North American Free Trade Agreement--Camacho has become a reminder that the country's political evolution may not follow the PRI's rigid script.

Mexico still is a democracy in name only, after all.

"They are not at all used to political fracturing or plurality in their system," says Holiber.

What's more, the Chiapas uprising--and the apparent kidnaping last Monday of one of the country's top bankers, Alfredo Harp Helu--have revived painful discussions about how relatively little wealth generated by the country's economic revival has actually trickled down to the peasant masses.

The stock market's worst nightmare is that Camacho, if he runs, could take enough votes away from Colosio to throw the August election to a left-wing candidate. That would raise the specter of re-nationalization of industry and a rejection of the NAFTA treaty in whole or in part.

If the backdrop for the PRI's woes was a healthy economy, the stock market might have been able to deal better with election fears. But it didn't help that 1993 saw the lowest level of real economic growth (0.4%) in Mexico in seven years, in part because of uncertainty about NAFTA's passage in the United States for most of the year.

The economy's slowdown depressed Mexican corporate profits in the second half of the year, and those lousy profit reports put added downward pressure on stock prices in late February and into this month, Holiber says.

Still, in the back of many investors' minds is that all of this may well be transitory--and that the odds favor Mexican stock prices being sharply higher two to three years from now, if the economy returns to the fast track. The question then is, how low should investors allow Mexican stock prices to get in this selloff before jumping back in?

The market's current average price-to-earnings ratio, as calculated by the Mexican Investment Board, is about 18 based on 1993 earnings, which isn't exactly dirt-cheap. Assuming earnings improve this year, the 1994 P-E is lower, of course.

Holiber, however, warns that first-quarter earnings, which will be reported in April and May, probably won't be encouraging. But that may not be a big problem, he says, only because by now, "nobody is holding out any hope that the first-quarter numbers are going to be good."

What worries Holiber and other U.S. investors is that the Mexican market's decline so far has been more a function of a sudden lack of buying than a result of heavy selling. That suggests that many investors who may want to cash out of their Mexican stocks haven't yet been given an opportunity.

The risk now is that a sudden wave of buying by bargain hunters will immediately bring an avalanche of shares onto the market from desperate sellers, sending the market into a new tailspin.

"Any increase in prices becomes an opportunity to sell," warns Luis Maizel, head of LM Capital Management in La Jolla, who just returned from a week in Mexico.

Holiber says such a selloff would complete the panic cycle.

"Our feeling is that we're within 10% of the bottom," he says. A 10% decline in the Bolsa from here would drop it to about 2,130, which is where it was just before NAFTA was approved by Congress in mid-November.

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