Mexico: Up on rating maintenance – November 2009 IXE-Banif Market Analysis

The Mexican economy seems to be finally leaving behind the negative catalysts that were driving it. Growths shown during the last quarter are mostly spectacular, although it is important to say that this is partially a consequence of the easy comparisons generated by the weak performance of the past. Still, numbers show a recovery and expectations are that the current quarter will be even stronger. Mexico – Monthly Allocation – November 2009

One of the main downward drivers of the Mexican stock market was the expectation that rating agencies would downgrade the country on the back of the strong decrease in public revenues. The increase in taxes, still waiting approval, should solve this issue satisfactorily, although not being the most appropriate solution considering domestic economic activity. Increasing taxes is never a popular measure, but to maintain ratings unaltered this sacrifice is valid. Thus, as the Mexican market strongly lags the Brazilian, we expect that the approval of the tax reform and consequent maintenance of the country’s rating should result in an upward movement for the Mexican Stock Exchange BMV.

The main problem in the short-term seems to be inflation. Although it has remained at a low level, and in the range established as acceptable by the Central bank, with the freezing of gasoline prices and the reduction of other energy prices, the increase in taxes will likely signify an increase from the current low level of inflation. However, the Central Bank has show clear signs that it will not worry about this for the time being and that its main concern is the reactivation of economic activity.

US economy driver of the markets
The 3Q09 GDP of the USA came in as an extremely positive surprise at 3.5%, above the market consensus of a 3.2% growth and just after some respected economists had alerted investors to the possibility of it being even lower. The trend of the American economy becomes more and more important to watch in determining investment opportunities in Mexico. Not only does the country’s economy base itself on supplying mainly the US, but it also depends on remittances from Mexican workers in the USA to Mexico. In September, there was a 17.56% contraction in remittance, much worse than the estimated 13%. Thus, numbers of jobs eliminated in the Mexican society is a number to follow carefully. Unemployment rate reached nearly 10%, but if we look at the Hispanic community, this number increases to above 12%.

For November, we will continue betting pretty much on the same sectors as before. That is, companies related to the domestic economy. Our preferences continue to be the homebuilding and infrastructure segments, as well as the retail sector that will probably suffer less from the imminent tax increases awaiting approval by Congress.

Outperforming the IPyC – (“LONG”)
Stock – Catalysts/Fundamentals
AMXL – diversification and growth in penetration rate leading to higher ARPU
CEMEX – Underperforming peers and trading at attractive valuations
FEMSAUBD – solid growth in Sales and EBITDA
GAP – expectations of positive numbers during the last months of the year
GEOB – beginning of operations in the USA and Brazil
GMEXICOB – reducing exposure on the delay of the decision on Asarco
ICA – important projects in 4Q09, specifically in November
Peñoles – gold and silver consumption increase in India and China
Televisa – merging cable service and forming largest operator in Mexico
URBI – trading at attractive valuations
WALMEXV – improved sales during the Christmas season and not affected by tax increase

Short suggestion for October
Megacable – valuations are expensive
SARE – poor performance leads to bankruptcy