Mexican Stocks Surge as Merrill Says ‘Buy’

Wall Street had a good day Wednesday, but Mexico’s stock market had an even better one.

The main Mexican share index, the IPC, rocketed 328.60 points, or 6.2%, to end at 5,628.53, bringing its two-day gain to 10%.

Merrill Lynch & Co. helped propel the market by recommending that investors increase their holdings of Mexican stocks, citing an expected increase in consumer spending and the government’s plans to backstop the economy with a credit line from the International Monetary Fund and other lenders.

Merrill boosted the weighting of Mexican shares to 36.9% from 32.2% in the firm’s model Latin American portfolio, jettisoning small positions in Colombia and Peru to raise the Mexican stake.

“We think the larger markets are where the action is,” said Robert Berges, Latin America strategist at Merrill. He said the Mexican market’s recent pullback “makes stock valuations a lot more compelling, and we think we will start seeing a recovery in consumption.”

The IPC index fell 16% from its record high of 6,080 from May 10 to Monday’s close. With the gains of the last two days, the market remains one of the world’s best performers, up 42% year-to-date in peso terms and 49% in dollar terms, as the peso has strengthened against the dollar.

By contrast, the Dow Jones industrial average is up 17.5% this year.

On Tuesday, Mexico said it had lined up $23.7 billion in international loans, seeking to assuage concerns about possible financial turmoil in the lead-up to next year’s presidential election. For the last 25 years, the presidential transition has fueled inflation and slammed the peso’s value.

Meanwhile, the economy is looking better. Industrial output rose 4.3% in April from a year earlier, as a spurt in manufacturing and construction signaled that business could be pulling out of a six-month slowdown.

Merrill’s picks for its model Latin portfolio include Telmex, the nation’s biggest telephone company; Grupo Televisa, the nation’s biggest broadcaster; retailer Cifra; and cement giant Cemex.

Telmex and Grupo Televisa are among many Mexican companies that have shares trading on the New York Stock Exchange as well as on the Mexican market--making it easier for U.S. investors to buy the stocks.

The U.S.-traded shares track the moves of the Mexico-traded ones. So far this year, Televisa and Telmex are up 79% and 60%, respectively, on the NYSE.

Despite the strong Mexican rally, however, some companies are struggling. Grupo Radio shares have been lackluster as radio ad expenditures by Mexican companies slumped in the first quarter.

Shares of Grupo Casa Autre, a major drug distributor, have tumbled 40% this year on worries about consumer spending. But the stock was a big gainer Wednesday on optimism that spending will pick up.

Other ways to own Mexican shares:

* Open-ended Latin American mutual funds. Such portfolios often hold 40% to 50% of their assets in Mexico, given its size relative to other Latin markets.

The average Latin fund was up 21% year-to-date through last Thursday, according to Lipper Inc. Top performers include the Merrill Lynch Latin America fund, Morgan Stanley Dean Witter Latin America, Nicholas Applegate Latin America and Templeton Latin America.

* Closed-end stock funds, such as the Mexico Fund, which trades on the NYSE. The fund is up 50% so far this year.

Of course, investing in any emerging market is a high-risk proposition, experts note, and Mexican stocks might well be considered more of a speculative bet than an investment.