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Mexico Likely to Stay High on Investors' Lists

August 14, 1994|RUSS WILES | RUSS WILES, a financial writer for the Arizona Republic, specializes in mutual funds

Mexicans go to the polls later this month to decide the fate of the incumbent Institutional Revolutionary Party (PRI). But regardless of the outcome, the country will probably remain a darling among U.S. mutual funds that invest in emerging foreign stock markets.

Mexico watchers say that's because the free-market reforms that have helped transform Mexico from an economic basket case aren't likely to be reversed even in the unlikely event that the PRI loses the presidency for the first time in six decades. Although short-term uncertainty would result from an upset and the pace of reform might lag, the direction won't change.

"Regardless of the outcome, the direction of Mexico's economic future is guaranteed," Jonathan E. Heath, chief economist at Mexico City think tank MACRO Asesoria Economica, wrote in a recent report.

"Political debate on economic issues has focused on possible alternative paths within Mexico's new development model, with very few arguing for an all-around reversal," he added.

If anything, investors now seem more confident that the PRI and its presidential candidate, Ernesto Zedillo, will fare well later this month, as indicated by rising stock prices in Mexico City.

"We're very bullish," says Erin Spatz, Latin American analyst for Pioneer Mutual Funds in Boston.

Some even feel that Mexican stocks have become a bit pricey now that they are near historic highs. The market, which rose by a third in late 1993, sustained sharp losses early this year when an armed rebellion broke out in the southern state of Chiapas and Luis Donaldo Colosio, Zedillo's predecessor as the PRI presidential candidate, was assassinated in Tijuana.

Spatz and others believe the PRI is making a concerted effort to ensure that the Aug. 21 vote will be a valid, fraud-free election, thereby removing another source of worry.

That should allow investors to focus again on Mexico's general economic picture, which has been one of sustained progress under President Carlos Salinas de Gortari:

* Mexico's inflation rate has dropped to about 7% from more than 150% in 1987.

* The government has run a budget surplus the last two years.

* Foreign investment has doubled since 1990.

* Exports are growing and are much less dependent on petroleum.

* The government has eliminated price controls, privatized much industry, reduced tariffs and cut tax rates.

Mexico's economy grew by only 0.4% in 1993, the slowest pace in five years, but much of that can be explained by uncertainty about whether the United States would ratify the North American Free Trade Agreement. Approval came in November, and now that business leaders on both sides of the border can proceed with their plans, Mexico should see higher growth this year, many believe.

"The U.S. economy is picking up, and Mexico is a prime candidate to piggyback on that," says Caroline Lane, London-based portfolio manager of the Govett Latin America Fund, which is headquartered in New York.

Lane recently raised her fund's Mexican exposure to 49% of total assets from 39% in mid-July.

James Capel & Co., a London investment firm, predicts 4% real annual growth for Mexico over the rest of the decade.

But while Mexico's long-term growth prospects appear solid, there is disagreement as to whether this is already reflected in Mexican share prices. Lane believes the bad-news selling of spring has abated, and Spatz is heartened by an expected 22% to 25% improvement in Mexican corporate profits next year.

But Josephine Jimenez, portfolio manager of the San Francisco-based Montgomery Emerging Markets Fund, believes that the peso remains overvalued against the dollar and that Mexican stock prices are fairly high. This explains why she reduced her fund's Mexican exposure to 6% currently, down from 10% in December.

Similarly, global money manager Charles Brandes of San Diego says he isn't finding many values in the Mexican market, with the exception of Telefonos de Mexico, the country's dominant stock. If you remove this issue, which is trading at a price-earnings ratio of about 9, and banking shares, which are also selling at low multiples, "Mexican stocks are not that cheap," Brandes says.

Also troubling to Jimenez is Chiapas. When she visited the region in May, she found an unsettled situation in an economically important state that accounts for a large portion of Mexico's electricity, natural gas, coffee and corn output.

"The conflict in Chiapas has not been resolved," she says.

Although Jimenez has turned more positive on Mexico in recent weeks as interest rates have dropped and the political risks seem to have abated, Chiapas remains a "wild card" that could set an example of unrest for other Latin American countries with large Indian populations, she says.

But Spatz doesn't think the Chiapas turmoil will derail Mexico's movement along a free-market path. To the contrary, she says, the people in this region rebelled because they have seen good in the reforms and want to be included.

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