Navigating the storm: Mexican telecom stocks avoid pitfalls suffered by peers. (Market Moves).

Equity markets in the United States and Mexico have registered serious profit-taking in recent weeks. Both markets succumbed to a crippling combination of poor financial results, high valuations, rumors of further terrorist attacks and various corporate fraud scandals. And while the first three factors may have been easy to anticipate, the final one was not.

The Worldcom scandal has affected many market sectors worldwide, but none as much as the global telecommunications industry. The first reaction came from debt markets, where demand for commercial paper in the sector plunged, given investors' sudden aversion to large companies in the sector.

This in turn has forced several companies to seek bank credits or sell off non-strategic assets at bargain prices to finance short-term debt payments. Moreover, the problems have been coupled with heavy drops in the prices of these companies' shares.

LOCAL TELECOM

In Mexico, however, the effects of this crisis are likely to prompt mostly temporary falls in telecom-sector stock prices. Indeed, contrary to some other countries, there have been no visible difficulties in Mexico's debt markets, where a strong appetite for corporate debt remains, because of the increasing levels of capital being handled by investment societies and retirement fund administrators (Afores).

Even so, few local companies enjoy the kind of credit ratings that enable them to fully access these markets. Among those that do are Telefonos de Mexico (Telmex) and America Movil, which stand to face little or no difficulty in obtaining the sort of financing they need from the local debt market. On the other hand, it is also likely that some of their competitors will now be subject to far greater investor scrutiny than before.

TELECOM TRENDS

On an international level, the select group of telecom players who stand to emerge unscathed from this bout of market turmoil will be the ones who always do: those with good management, conservative financial structures and a lot of patience. Namely, this group includes companies of the caliber of SBC, Vodafone, Telefonica de Espana and, of course, Telmex, to name a few.

In fact, we will probably see these companies' stocks recover much faster than those of their peers, and they are likely to be the main buyers of cheap telecom assets on the market. One such example is America Movil's majority control purchase into Telecom Americas at a very attractive price.

Nevertheless, I believe the worst is yet to come for global equity markets, as concerns over corporate accounting practices will probably linger in the United States for several months. We can also expect corporate profits to remain under heavy pressure in the near future.

LOOKING AHEAD

Fortunately, the long-term market outlook is much more encouraging. Somewhere down the line, the U.S. Federal Reserve's interest rate cuts should begin boosting the U.S. economy to a considerable degree. Similarly, international markets will eventually move to discount this recovery.

Investors should be on the lookout for this development, although investments shouldn't necessarily be made at the first signs of a minor adjustment. What we're talking about here is the big shift that could very well occur in the following months--maybe October. This shift will demand far more aggressive positioning. The concept of buying low and selling high is simple enough, but not easy to follow if the bargains emerge when the outlook is bleakest.

Martin Lara is a Mexico City-based independent financial analyst.

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