Mexico: Waiting for Congress – October 2009 IXE-Banif Market Analysis

The world seems to be doing better, and with it the USA economy. The FED continues to maintain rates at very low levels, between 0 and 0.25%, and will likely not change this policy until mid 2010, and then only if inflation starts getting out of hand especially once governments finally take the step to start reducing liquidity.

Download: Mexico - Monthly allocation - October 2009
However, Mexico lags the rest of the world while it continues to await the discussion of Congress on the economic package. Congress has until November 15 to vote on the project. The vote is not an easy one as President Calderon asks for tax increases at a time when Mexico, more than other countries, suffers from the financial crisis. Thus, our expectation is that they will use all the time that they legally have to vote.

This means that we will probably see Mexico showing growth once more only in 2010, and only if the USA economic activity continues to develop positively, resulting in increased imports from the country. The increase in taxes brings with it another concern, inflation. One of the suggested measures is a 2% tax increase on food, which retailers will pass through to consumers. Thus, although there would be some room for interest rate decreases, the Bank of Mexico should maintain them unaltered until 1Q10, when they could actually increase them once more to prevent inflation.

Flow of funds and 3Q earnings will drive the market
One of the main indicators to watch in October is the amount of foreign resources flowing into Mexico. The fixed income has rallied of late with the amount of foreign resources going into the bond market. Part of these funds may change direction and, as in other parts of the world, start looking for opportunities in the Mexican stock market.
October is also a month when Mexican companies post their 3Q earnings. This will likely be one of the main drivers of the market this month. However, concerns on the effects of the fiscal package on some sectors may offset positive numbers for the quarter. We continue to bet on the homebuilding sector, as we believe demand continues strong and it continues to be a strategic sector for the government due to its social benefits and as it is a job creator in times of crisis.

Outperforming the IPyC
Stock – Catalysts/Fundamentals
AMXL – positive 3Q09 on MOU increase indicating higher revenues
ASURB– undervalued against sector, good value play
BIMBOA – will show EBITDA up by 60% and higher margins
FEMSAUBD – higher sales lead to positive 3Q09 earnings
GEOB – trading at attractive valuations
GMEXICOB – key month on legal process in the USA leads to a reduction in discount
GRUMAB – 3Q09 as strong as 1Q09 signifies a 70% growth
ICA – should post an excellent 3Q09 result
MEXCHEM – successful conclusion of bond issue allows for pre payment of debt
URBI – trading at attractive valuations
WALMEXV – expected 13% increase in EBITDA and 12% in sales

Source:Banif - IXE, 01.10.2009