They say, "When the U.S. sneezes, the rest of the world
catches a cold," and this seems to have proved true for an
emerging market like Mexico, the second largest economy in Latin
America. As the Fed kept faltering to taper QE, the Mexican peso
witnessed a roller-coaster ride in both the bond and stock
As things settled down after a week-long frenzy, it is time now
to cherry pick some Mexican stocks. But before we zero-in on
which ones to buy, let's have a recap of the vagaries in the
The Rise of the Mexican Peso
With its close ties to the U.S., Mexican assets - like the
relatively stable high-yielding government bonds - have been one
of the most lucrative investment propositions for investors to
leverage cheap loans in developed countries. Consequently, there
was a significant inflow of funds into the economy as foreign
holdings of peso debt amplified six-fold since 2009 to $1.75
trillion pesos ($136 billion) in Apr 2013.
Booming investor confidence triggered by a highly liquid market
and hands-off attitude by officials steered the peso to a 4.3%
return in 2013 till mid-May - the best performance among 16 major
currencies tracked by Bloomberg. The economy was further buoyed
by a reform push by the newly-formed government and a record-low
benchmark interest rate of 4% by the Bank of Mexico (Banco de
México). Bonds and stocks kept scaling newer highs as Mexico
gradually became the blue-eyed boy among investors.
The Ignominious Fall
On Jun 19, Fed Chairman Ben Bernanke announced his intentions to
start tapering and gradually phase out its $85 billion monthly
bond-buying program by 2014. Although the announcement indicated
an overall improvement in the U.S. financial system and dialed
down the need for any additional stimulus, it ruffled the
dynamics of several economies, including Mexico.
This led to a near stampede as foreign investors rushed for the
exit door and some of the worst sell-offs of Mexican bonds since
2010. With speculations being rife about Fed tapering since early
May, the Mexican peso plummeted from below 12 per dollar to over
13, while the benchmark ten-year bonds rose from a historic low
of 4.4% to 6.2%. Even Mexican Bolsa IPC Index, the Mexican Stock
Exchange, had an uncharacteristically sharp fall to close at a
A drastic fall in the currency and heavy outflow of capital have
catapulted expectations of a further lowering of interest rates
for a second time this year. At the same time, experts believe
that in order to prevent further fall, the government can bring
in some radical reforms by opening up the energy sector, which is
considered to be one of the vital pillars for augmenting the
long-term growth potential of the country.
On the other hand, some industry observers opine that subsequent
Fed tapering could be a "winner's curse" for Mexico as they
largely depend on the U.S. economy, which account for almost 80%
of its total exports. So an overall improvement in the underlying
growth factors for its northern neighbor would indeed work in
favor of long-term gains. Thus, would it be fair to wish to delay
the inevitable for short-term profit?
As markets have more or less stabilized, with reports of weaker
U.S. GDP growth forcing the Fed to reconsider its decision and
continue with the bond-buying program, it is déjà vu for
investors all over again. In this context, top Mexican stocks
with attractive valuation metrics backed by a solid Zacks Rank
methodology include home developer
Desarrolladora Homex, SAB de CV
) and airport manager
Grupo Aeroportuario del Pacifico S.A.B. de CV
Both of these stocks hold a Zacks Rank #2 (Buy). While
Desarrolladora Homex has a forward P/E and long-term earnings
expectation of 1.52 and 13.15%, respectively; Grupo Aeroportuario
has respective tallies of 19.67 and 9.37%.
We also suggest a couple of Zacks Rank #3 (Hold) stocks -
America Movil S.A.B. de C.V.
CEMEX, S.A.B. de C.V.
) - as they are expected to post robust earnings growth of 8.34%
and 18.98%, respectively.
Even some hedge funds are bullish on the Mexican peso and
anticipate the recently-found optimism to continue through year's
end. As fundamentals look strong, the market is getting flocked
by a huge pool of investors, creating short-term noises and
long-term opportunities. Only time will tell whether such
investor confidence is justifiable or not.
AMER MOVIL-ADR (AMX): Free Stock Analysis
CEMEX SA ADR (CX): Free Stock Analysis Report
DESARROLLADORA (HXM): Free Stock Analysis
GRUPO AEROP-PAC (PAC): Free Stock Analysis
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