Telmex Bears the Brunt of Mexican Slide

Mexico’s bull market is running low on fodder, hurt by rising interest rates and slowing economic growth--and the simple desire of investors to take profits after terrific price gains in recent years.

The Mexico City stock exchange’s Bolsa index plunged 67.34 points on Monday, then fell 49.60 points on Tuesday to close at 1,692.84. The two-day percentage loss was 6.5%--the equivalent of a 216-point Dow Jones drop.

From its all-time high of 1,907.36 on June 1, the Bolsa has now suffered an 11.3% slide.

The driving force behind the Bolsa’s decline has been heavy selling of Telefonos de Mexico, the Mexican phone monopoly that accounts for 25% of the Mexico City exchange’s total share value.

Telmex began to tumble last week on rumors that its workers’ union was planning to dump its 3% stake in the firm. By Monday, with the union rumors still fresh, Telmex was hit by a new brick: U.S. presidential hopeful Ross Perot’s attacks on the proposed U.S.-Mexico free trade pact.

Free trade is expected to be a boon for the Mexican economy by encouraging new development that would tap the country’s low-cost work force. If President Perot sits in the White House, there won’t be free trade and thus no new Mexican boom--or so stock traders supposedly began to reason this week.

As the company that most epitomizes the revitalized Mexican economy, Telmex quickly became a target. The stock, off $3.875 last week on the New York Stock Exchange, fell another $1.875 Monday and $1 Tuesday, closing at $48.50. That mirrored Telmex’s decline on its home exchange (each NYSE share represents 20 in Mexico).

Plausible as they may seem, both the union rumors and the Perot concerns are merely convenient excuses for investors to take profits after Telmex’s long rally, many analysts insist.

The NYSE Telmex shares made their debut in May, 1991, at $27.25 each, and peaked at $60.125 this past March. Even at Tuesday’s price of $48.50, an investor who has held the shares from their inception has a handsome paper profit of 78%.

“People have made a lot of money in Mexico and don’t necessarily want to commit more right now,” says Jeffrey Russell, manager at the Smith Barney World stock mutual fund in New York. So the easy decision for many Telmex owners has been to exit at least part of their holdings on any rumor.

Will the union sell its Telmex stake? Maybe--but at 3% of the total, so what? Would Perot be anti-trade? Many experts believe that it doesn’t matter, that business will flow to Mexico one way or another in the long run. Nonetheless, in the short run, some money managers believe that it’s logical to assume that Telmex--and Mexican stocks in general--will ease further.

Like the U.S. stock market, the Mexican market has become a victim of its own success. A crush of Mexican companies has sold new stock to the public both in Mexico and abroad this year to raise capital. The value of new Mexican shares either sold in recent months or expected to be sold in the near future is about $5 billion, Russell estimates.

That’s a huge supply, considering the Mexican stock market’s total value is just $136 billion. The result is a market suffering from indigestion, as too many new stocks face a dwindling cache of dollars and pesos available for investment.

More worrisome is that Mexico’s economy no longer appears so robust, says Soraya Betterton, manager of the GT Latin America stock fund in San Francisco. A rise in short-term interest rates from 10% to 14% this year has slowed growth.

Rainey Sellars, a Latin American specialist with Baring Securities in New York, says the surprise may be that Mexico’s economy slows from a 4.5% growth rate in the first quarter to little or no growth this quarter. The expansion would then be expected to pick up again later this year, with a continuing U.S. economic recovery.

Thus, in the near-term, economic concerns and simple profit taking could continue to weigh on the Mexican market, analysts admit.

What about Telmex in particular? Mark Fane, a Mexico specialist with brokerage Blair, Foster & Co. in L.A., says Telmex now trades for 11 times the $4.50 per NYSE share it’s expected to earn this year. For a company growing 15% to 20% a year, that’s cheap, Fane insists. But he concedes the stock may not yet have bottomed.

The Mexican Stock Boom

The Mexico City stock market has tripled in value since the start of 1991, but in recent days the market has tumbled on profit-taking. A look at the Bolsa index of Mexico’s 40 most active stocks:

Bolsa index at start of each month, except latest

Tuesday’s close: 1,692.63

Source: D.A. Campbell Co.