Looking for safety: specter of war, plummeting peso have investors running for cover. (Market Moves).

For my first column in BUSINESS MEXICO, the task of finding upside in the local markets could hardly have been more difficult.

Threatened by a diverse array of negative external factors, investors worldwide are in a jumpy state--with emerging markets and U.S. markets and equities suffering as a result. So where does that leave Mexico, an emerging market with strong U.S. ties? The answer is clearly written in red--the peso has fallen dramatically versus the dollar and even worse versus the euro and other "safe" currencies.

The Bolsa, for its part, has been stuck in a bear-hug throughout this new year, despite some solid fourth quarter reports, dropping almost 7% from Jan. 10 to Feb. 10. This has left investors looking at fixed-income markets, gold and other traditional havens. In the current environment, investors' decisions are subject to two criteria--when will war start and when will it end? Since the answers aren't staring us in the face, the flight has been for safety.

FEW WINNERS

This shift has been evident on the Mexican bourse. Retail giant Walmex has been the only blue chip to eke out a gain, helped by an oversell at the end of last year. The less liquid Walmex C has risen 3.5% from Jan. 10 to Feb. 10 and the heavier V series has put on 0.8%. The company reported by Feb. 10, where it again showed better-than-expected results and still-improving market share.

Other, second-line winning stocks (in peso terms) can be counted on one hand. Construction firm Geo (+1.3% from Jan. 10 to Feb. 10) and agricultural exporter Savia (+4.1%) have been taken up on pre-results speculation, while miners Grupo Mexico (+5.5%) and Penoles (+2.3%) have benefited from rising metal prices. Coca-Cola Femsa (+2.5%) has simply been recovering from a battering following the news of its takeover of Panamco's operations.

While the picture is fairly grim at the moment, a handful of names were punished excessively in the period and now have an attractive upside, external (i.e. Iraq) factors notwithstanding. Wireless giant America Movil, which reported strongly, is a healthy safety play with a growing LatAm portfolio that has been consolidating between 7.5 and 8 pesos for two months. Elsewhere, Modelo is looking good as a safety play with its strong export revenues and its current cheap valuation. A riskier play might be TV Azteca, which has been stewing around the 3-peso mark, due largely to the "Salinas" factor--perceived unpredictablility among top management. A suitable settlement in its Unefon battle with Nortel could be a catalyst to a price recovery.

'SUPERPESO' NOT VERY BUFF

Looking more broadly, one area where there has been significant action is in the foreign exchange markets. The word 'superpeso' is now a distant memory as the local currency has tested new depths, driven entirely by a worldwide switch from the dollar into the euro and other safe havens. The peso hit a new low against the dollar--11.04--on Feb. 7.

A look around the currency markets will show strengthening not only in the euro, but other European currencies--the pound and the swiss franc, to name two--while further abroad, the South African rand has shown notable strength as has the Australian dollar. With all things remaining the same (an admittedly unlikely scenario), we can see the dollar consolidating between 1.07 and 1.10, though a jump to 1.30 in the case of a U.S. war and are turn to 1:1 parity in the case of war finishing quickly is what we are estimating. This is likely to continue affecting the peso in a 2:1 relationship, and this trend looks like continuing--so a sharp jump to 13 pesos to the dollar is definitely not out of the question.

With so much volatility in the currency market coupled with the bear equity market, medium-term debt seems to be the safest option here in Mexico, with the idea of straddling either side of turbulence caused by an eventual conflict.

[GRAPH OMITTED]

Index                              Jan. 31 2003        NOMINAL

                                                 Monthly   Accrued

Stock Market                          INDEX

IPC                                  5,954.35     -2.8%     -2.8%
INMEX                                  325.87     -2.4%     -2.4%

Mutual Funds

Equity                               1,980.96     -2.5%     -2.5%
Debt for Individuals                 3,934.80      0.6%      0.6%
Debt for Corporations                1,538.88      0.5%      0.5%

Economic Activity

Industrial                           2,426.96     -3.8%     -3.8%
Retail                               8,980.99     -2.2%     -2.2%
Non-Financial Services               5,547.81     -5.0%     -5.0%
Insurance and Banks                  3,835.99     13.8%     13.8%
Broker Firms                           414.03      0.0%      0.0%
Financial Groups                       258.11     -0.3%     -0.3%

Sector

Mining                               4,479.15     14.3%     14.3%
Industrials                          2,318.70     -6.8%     -6.8%
Construccion                         9,600.35     -6.5%     -6.5%
Retail                              11,295.27      0.1%      0.1%
Communications and Transportation   24,368.65     -1.1%     -1.1%
Services                               859.09      2.7%      2.7%
Holding Companies                    1,984.60     -9.2%     -9.2%

Index                                    REAL (1)         DOLLARS
                                                            (2)

                                   Monthly   Accrued   Monthly

Stock Market

IPC                                 -3.2%     -3.2%     -8.8%
INMEX                               -2.8%     -2.8%     -8.4%

Mutual Funds

Equity                              -2.9%     -2.9%     -8.5%
Debt for Individuals                 0.2%      0.2%     -5.6%
Debt for Corporations                0.1%      0.1%     -5.7%

Economic Activity

Industrial                          -4.1%     -4.1%     -9.7%
Retail                              -2.6%     -2.6%     -8.2%
Non-Financial Services              -5.4%     -5.4%    -10.9%
Insurance and Banks                 13.4%     13.4%      6.9%
Broker Firms                         0.4%      0.4%     -6.1%
Financial Groups                    -0.7%     -0.7%     -6.4%

Sector

Mining                              13.8%     13.8%      7.3%
Industrials                         -7.2%     -7.2%    -12.6%
Construccion                        -6.9%     -6.9%    -12.2%
Retail                              -0.3%     -0.3%     -6.1%
Communications and Transportation   -1.6%     -1.6%     -7.2%
Services                             2.3%      2.3%     -3.6%
Holding Companies                   -9.6%     -9.6%    -14.8%

Index                               DOLLARS
                                      (2)

                                   Accrued

Stock Market

IPC                                 -8.8%
INMEX                               -8.4%

Mutual Funds

Equity                              -8.5%
Debt for Individuals                -5.6%
Debt for Corporations               -5.7%

Economic Activity

Industrial                          -9.7%
Retail                              -8.2%
Non-Financial Services             -10.9%
Insurance and Banks                  6.9%
Broker Firms                        -6.1%
Financial Groups                    -6.4%

Sector

Mining                               7.3%
Industrials                        -12.6%
Construccion                       -12.2%
Retail                              -6.1%
Communications and Transportation   -7.2%
Services                            -3.6%
Holding Companies                  -14.8%

(1)January inflation:0.4%

(2)January depreciation:5.1%

Gianluca Baratti works as a stock market analyst at Finamex Casa de Bolsa.