Mexico Equity Bears Capitulate as JPMorgan Sees 16% Bolsa Rally

By Alexander Ragir and Michael Patterson

Sept. 11 (Bloomberg) -- Traders who bet against Mexican equities in record numbers two months ago are closing out their positions as Latin America’s second-largest economy heads for the steepest recovery worldwide.

The amount of borrowed shares in the 10 biggest Mexican companies dropped last week to the lowest level this year, according to New York-based Data Explorers, which follows trading by more than 100 securities-lending firms and 20,000 funds. Data Explorers estimates most of the stock loans are used in short sales, when traders borrow shares and sell them to profit from a decline by buying them back at a lower price.

Emerging Markets Management LLC and Deltec Asset Management say Mexican equities are cheap next to U.S. stocks. JPMorgan Chase & Co.’s Latin America research team sees the Bolsa index to rising 16 percent by yearend. Billionaire Carlos Slim said this week that Mexico’s worst slump since the 1930s has bottomed. The International Monetary Fund estimates the country’s gross domestic product will grow 3 percent in 2010 after shrinking 7.3 percent this year, the widest swing in the world’s biggest economies.

“The valuations look quite good,” said John Ditierri, a money manager at Arlington, Virginia-based Emerging Markets Management who helps oversee about $11 billion in equities. “Any kind of recovery is going to help Mexico.”

Banorte, Walmex

Shares on loan for Grupo Financiero Banorte SAB, the nation’s biggest publicly traded lender, dropped 39 percent since July, Data Explorers figures show. The amount slid 53 percent for Wal-Mart de Mexico SAB, Latin America’s largest retailer. Short interest in the U.S.-traded iShares MSCI Mexico Investable Market Index Fund declined 39 percent from a July record, New York Stock Exchange data show.

The Bolsa Index trades at a lower valuation than the Standard & Poor’s 500 Index and the MSCI Emerging Markets Index, though analysts forecast profits at Mexican companies will climb 9.8 percent this year while those in the U.S. and developing nations decline. A rebound in demand from the U.S., which buys 80 percent of Mexico’s exports, led Barclays Capital and BNP Paribas SA analysts to predict last month that the worst is over for the nation’s economy.

The Bolsa rose to the highest level since June 2008 yesterday, gaining 0.8 percent to 29,318.42. The 35-company index climbed for six consecutive months through August, the longest stretch of gains since January 2007.

Swine Flu, Deficit

The gauge’s 31 percent advance this year trails a 67 percent rally for the MSCI EM Latin America Index, a 56 percent increase for MSCI’s global emerging markets index and a 56 percent gain for the Bovespa index of shares in Brazil, Latin America’s biggest economy. The S&P 500 climbed 16 percent this year and China’s Shanghai Composite Index, a benchmark for companies in the biggest developing economy, added 61 percent.

The Bolsa lagged behind other indexes as Mexico’s economy shrank 10.3 percent last quarter from a year earlier and an outbreak of swine flu contributed to a 10.6 percent drop in industrial output in June. S&P said in May it may lower Mexico’s BBB+ credit rating, the third-lowest investment grade, should President Felipe Calderon fail to rein in the budget deficit. His 2010 plan cuts spending by 218 billion pesos ($16.3 billion), the Finance Ministry said this week.

Worsening violence in Mexico also weighed on stocks. El Universal newspaper reported that 4,881 people died this year as a result of organized crime as of Sept. 5.

‘Too Tame’

“The narco-trafficking situation is worrisome, the possibility of swine flu to have another big impact on Mexico is there,” said William Landers, who oversees about $6 billion in Latin America stocks at BlackRock Inc. in Plainsboro, New Jersey, and is “underweight” Mexican shares. “The discussions of the budget also aren’t going to be easy.”

Calderon’s budget proposal is “too tame” to avoid a credit- rating cut, UBS AG said in a report to clients on Sept. 9.

“There are other places more attractive” in Latin America, said Martin Herbon, who helps oversee about $900 million at Geneva-based Union Capital Group SA and prefers shares in Brazil and Peru, where the Lima General Index has climbed 104 percent this year.

Stock on loan for Monterrey-based Banorte climbed to 2.2 percent of shares outstanding in July from 1.4 percent at the beginning of 2009 as speculators stepped up bets the economic slump would increase credit losses. The shares have gained 31 percent the past two months, bringing the year-to-date advance to 67 percent.

Walmex Rally

Mexico City-based Wal-Mart de Mexico has jumped 26 percent since July 10, burning traders who had borrowed and sold about 1.2 percent of the shares outstanding. Morgan Stanley, Credit Suisse AG, Bank of America Corp. and Citigroup Inc. upgraded the company since mid-July after second-quarter earnings topped analysts’ estimates.

Declines in short interest foreshadowed previous rallies. The Bolsa index jumped by an average of 33 percent in the 12 months following monthly drops of at least 20 percent in short interest on the iShares Mexico fund, according to data compiled by Bloomberg since 2000.

The iShares fund had average daily volume of $146 million in the past three months, compared with $420 million on the entire Mexico Stock Exchange, Bloomberg data show.

Brazil Short Sales

The iShares MSCI Brazil Index Fund, which holds Brazilian shares and trades on the NYSE, has had a 33 percent jump in short interest since mid-July. Stock on loan rose for a sixth month in August to a one-year high of 25.9 billion reais ($14.3 billion), according to the country’s clearing and depository corporation known as CBLC.

Short sales in Mexico climbed to 78.2 million shares in July, the highest since at least January 2007, according to data from Bolsa Mexicana de Valores SA. Alberto Maya Sánchez, a spokesman for the exchange, said short-sale data for August isn’t available yet.

JPMorgan, voted the best Latin America research firm this year in Institutional Investor magazine’s annual poll of money managers, made Mexico its “top pick” among Latin American stocks last month. Ben Laidler, the New York-based head of Latin America equity research, predicts the Bolsa will rise to a record 34,000 by December and says the market is valued at 13.3 times analysts’ earnings estimates for next year, below the five-year average of 15.6.

Cheaper Valuations

The Bolsa trades for 18.5 times the reported profit of its companies during the past 12 months, compared with 20 times for MSCI’s global emerging-markets gauge and 19.3 times for the S&P 500, according to Bloomberg data. Earnings growth in Mexico may accelerate to 19 percent next year as the economy recovers, JPMorgan said.

Slim, 69, the world’s third-richest man and controlling shareholder of Mexico City-based Telefonos de Mexico SAB, said Sept. 7 that the economy’s “greatest decline happened in the second quarter.”

“For the rest of the year, Mexico could be an outperformer,” said Cristian Moreno, a Banco Santander SA strategist in New York who raised the nation’s stocks to “overweight” from “underweight,” according to an Aug. 26 research note.

The disparity between Mexico’s stock performance and other Latin America stocks, combined with prospects for a U.S. economic rebound makes the market attractive, said Greg Lesko, head of equity at Deltec.

“The Mexico call makes a lot of sense,” said Lesko, who helps manage $625 million in New York and has been adding to holdings of Mexican shares. “As the U.S. recovers, some of the more dramatic turns will take place in Mexico.”

To contact the reporters on this story: Alexander Ragir in Rio de Janeiro at aragir@bloomberg.net; Michael Patterson in London at mpatterson10@bloomberg.net.