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Building momentum: ratings upgrades, housing sector boost economic outlook.

In late January, the S & P ratings agency published a glowing report alongside its decision to upgrade Mexico's foreign currency rating:

"The upgrade reflects the gradually increasing macroeconomic mac·ro·ec·o·nom·ics  
n. (used with a sing. verb)
The study of the overall aspects and workings of a national economy, such as income, output, and the interrelationship among diverse economic sectors.
 stability attributable to steady improvement in external liquidity and deepening deep·en  
tr. & intr.v. deep·ened, deep·en·ing, deep·ens
To make or become deep or deeper.

Noun 1. deepening - a process of becoming deeper and more profound
 domestic financial markets, resulting in greater resilience resilience (r·zilˑ·yens),
 to potential negative shocks. ... Growing domestic debt markets are allowing Mexico to sidestep side·step  
v. side·stepped, side·step·ping, side·steps

1. To step aside: sidestepped to make way for the runner.

 one of the historic weaknesses of most Latin American sovereigns, namely the inability to raise fixed-rate, long-term debt Long-Term Debt

Loans and financial obligations lasting over one year.

For example debts obligations such as bonds and notes which have maturities greater than one year would be considered long-term debt.
 in local currency."

The Moody's ratings agency had announced a similar move in early January. These two important signs of confidence, combined with the much-anticipated inclusion of local pension funds (or Afores) in the Bolsa Bolsa

Spanish for stock exchange.
 and strong fourth-quarter operating results, fueled a 5 percent year-to-date Year-to-date (YTD)

The period beginning at the start of the calendar year up to the current date.
 rise in the national stock market.


Another important factor affecting the Mexican Mexican

named after or originating in Mexico.

Mexican axolotl
see ambystomamexicanum.

Mexican beaded lizard
(Heloderma horridum
 capital markets has been the apparent victory by the Central Bank in its war on inflation ... at least for the moment. The announcement in mid-February that January had produced zero inflation brought great relief to capital markets, most notably the bond market. As a result, the Central Bank left monetary policy unchanged in February.

The peso had been trading within a range of 11.15 to 11.30 over the past few months, but now it appears to be firmly within an 11.15 to 11.20 range. This important technical breakthrough could indicate a period of sustained peso strength for the first quarter of 2005. The flipside being that this could then heat up the inflation rate in the medium term.

The Housing Sector

Perhaps the most telling evidence of the strength of Mexico's stock-listed housing sector over the past few years is how expensive these shares are in comparison to similar stocks in North America North America, third largest continent (1990 est. pop. 365,000,000), c.9,400,000 sq mi (24,346,000 sq km), the northern of the two continents of the Western Hemisphere.  and Europe.

In fact, Mexican home building stocks are trading at the highest premiums in their history. Using a price-per-earnings ratio that incorporates projected earnings for 2005, we see Mexican home builders trading at levels around 15 times price-per-earnings 2005. Meanwhile, U.S. housing stocks trade around 8 times price-per-earnings 2005.

The market faces an interesting dilemma. There is little doubt that this sector will continue to grow at a tremendous rate for years to come. Furthermore, direct foreign capital investment in the housing sector will surely add an element of "the sky is the limit" mentality men·tal·i·ty
The sum of a person's intellectual capabilities or endowment.
 to growth prospects.

A prime example is the joint venture between Prudential Prudential is the name of two different companies and buildings named after them:

  • Prudential plc is a United Kingdom-based financial services company.
  • Prudential Financial, Inc.
 Real Estate Corporation and Corporacion GEO (Geostationary Earth Orbit) A communications satellite in orbit 22,282 miles above the equator. At this orbit, it travels at the same speed as the earth's rotation, thus appearing stationary. . In this instance, Prudential committed US$175 million to increasing GEO's land bank on which to build future homes. But, as the future multiples indicate, it seems investors already have factored this into their pricing models. Hence the dilemma.

We may be nearing a "good news, bad news" scenario, where on one hand prospects for growth and margin expansion seem very bullish Bullish

Word used to describe an investor's attitude. Bullish refers to an optimistic outlook, while bearish means a pessimistic outlook.

. But on the other hand, investors' excitement for the sector has created an expensive environment. This likely points toward profit-taking in the medium term.

Because housing stocks arguably ar·gu·a·ble  
1. Open to argument: an arguable question, still unresolved.

2. That can be argued plausibly; defensible in argument: three arguable points of law.
 have been the main driver of the Mexican equity market, this situation could temper tem·per
1. A state of mind or emotions; mood.

2. A tendency to become easily angry or irritable.

3. An outburst of rage.
 any near-term equity rallies in Mexico. The big losers could be those who diverted di·vert  
v. di·vert·ed, di·vert·ing, di·verts
1. To turn aside from a course or direction: Traffic was diverted around the scene of the accident.

 part of their savings into the equity market.

I say this because January 17 was the first day Afores could be invested in equities. The temptation Temptation
Terror (See HORROR.)


as fruit of the tree of knowledge in Eden, has come to epitomize temptation. [O.T.: Genesis 3:1–7; Br. Lit.
 to invest in the highest growth sector in the Bolsa might be too strong for local Afores managers. One probable result would be that U.S. and European investors, who in many cases have earned returns of over 100 percent in the past two years, end up selling their shares to Mexican Afores managers.
INDEX                            31/01/'05      NOMINAL
                                 Index      Monthly  Accrued

IPC                              13,097.12   1.4%     1.4%
INMEX                               758.26   1.2%     1.2%
Equity                            3,535.35   0.5%     0.5%
Debt for Individuals              4,310.59   0.5%     0.5%
Debt for Corporations             1,705.83   0.6%     0.6%
Industrial                        4,978.75   0.0%     0.0%
Retail                           16,383.95   0.9%     0.9%
Non-Financial Services           11,468.62   0.4%     0.4%
Insurance and Banks               7,973.87  17.3%    17.3%
Broker Firms                        466.98   0.0%     0.0%
Financial Groups                    565.51   4.1%     4.1%
Mining                           16,600.52  -0.5%    -0.5%
Industrials                       4,205.98   1.1%     1.1%
Construction                     22,421.22   5.0%     5.0%
Retail                           20,015.56  -0.1%    -0.1%
Communications & Transportation  56,396.95   0.1%     0.1%
Services                          1,948.02   4.9%     4.9%
Holding Companies                 4,375.54  -0.5%    -0.5%

INDEX                                REAL (1)        DOLLARS (2)
                                 Monthly  Accrued  Monthly  Accrued

IPC                               1.4%     1.4%     1.1%     1.1%
INMEX                             1.2%     1.2%     0.9%     0.9%
Equity                            0.5%     0.5%     0.2%     0.2%
Debt for Individuals              0.5%     0.5%     0.2%     0.2%
Debt for Corporations             0.6%     0.6%     0.3%     0.3%
Industrial                        0.0%     0.0%    -0.3%    -0.3%
Retail                            0.9%     0.9%     0.6%     0.6%
Non-Financial Services            0.4%     0.4%     0.1%     0.1%
Insurance and Banks              17.2%    17.2%    16.9%    16.9%
Broker Firms                      0.0%     0.0%    -0.3%    -0.3%
Financial Groups                  4.1%     4.1%     3.8%     3.8%
Mining                           -0.5%    -0.5%    -0.8%    -0.8%
Industrials                       1.1%     1.1%     0.8%     0.8%
Construction                      5.0%     5.0%     4.7%     4.7%
Retail                           -0.1%    -0.1%    -0.4%    -0.4%
Communications & Transportation   0.1%     0.1%    -0.2%    -0.2%
Services                          5.0%     5.0%     4.5%     4.5%
Holding Companies                -0.6%    -0.6%    -0.8%    -0.8%

(1) January inflation: 0.0%
    January-January inflation: 0.0%
(2) January depreciation: 0.3%
    January-January depreciation: 0.3%

Information provided by AMCHAM economist Jose Antonio Hernandez Balbuena

Ramon Ruiz ( is a managing partner of Vintage Partners.
COPYRIGHT 2005 American Chamber of Commerce of Mexico A.C.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2005, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:MARKET MOVES
Author:Ruiz, Ramon
Publication:Business Mexico
Geographic Code:1MEX
Date:Mar 1, 2005
Previous Article:Worker safety.
Next Article:Mortgaging for growth: home building serves as engine of economy.

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