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LATIN AMERICA: "Mexico - Mandatory Profit Sharing" Alert. 9-page report called "Reform to Mexico’s Federal Labor Law", by Baker & McKenzie.
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backLATINtalk July, 2012
Disappointing production figures may hint at coming Mexican market trouble
Last week we wondered if some of the recent outperformance in the Mexican market might stall as political realities bring sentiment down to earth.
Almost all presidential candidates ran on a platform of increased reforms and market liberalization, helping the domestic Mexican market to withstand some of the negative sentiment in global indexes.
While the iShares MSCI Mexico Investable (EWW, quote) is down about a third of a percent the last week, it is still outperforming the iShares MSCI Emerging Markets (EEM, quote) with its loss of about 3%, and a 1.8% drop in the S&P 500.
While short-term and long-term opinion remains outperform for the Mexican market, I do believe some market losses are probable given global risk and the recent relative performance. Industrial output for May dropped unexpectedly by 0.93% from April. The loss was largely driven by a 1.38% decline in manufacturing and related to the recently weak Institute for Supply Management reports for U.S. oil production, accounting for about 35% of fiscal revenues, which dropped 1.9% over the past year and further signaled the need for energy sector reforms.
Weakness in U.S. manufacturing and a further escalation in global economic jitters could lead to a further decrease in Mexican production. Investors should not bet on stimulus from the central bank. June inflation surprised on the upside at 4.34%, the highest since 2010 and above the central bank’s range of 2% to 4%.
Investors may want to use manufacturing firms and related investments as a hedge against further weakness, especially with moderating data in the U.S. Consumer demand should remain fairly resilient and continue to outperform.
Fomento Economico Mexicano (FMX, quote) is a strong bet on the domestic market. The company produces and distributes non-alcoholic beverages and beer, including the Coca-Cola franchise for the Mexican market. The company also operates a chain of convenience stores in Mexico and Colombia.
Media conglomerate Grupo Televisa (TV, quote) is the largest media conglomerate in the Spanish-speaking world. It has operations principally in the Mexican market and American market and may stand to gain implicitly with the incoming president in December, Enrique Peña Nieto, who is married to a well known telenovela star and close to various board members.
Competition may increase with the upcoming launch of MundoFox, the Spanish-speaking station by News Corp (NWSA, quote). The company reports earnings next week with expectations for a 91% jump in earnings to $0.21 per share, though results often surprise to the downside.
Grupo Simec (SIM, quote) is a manufacturer and distributor of steel products for North America and may give back some of its 30.1% year-to-date gains as manufacturing slows. The company is expected to post a 27% drop in earnings per share when it reports second quarter results towards the end of the month.
The country fund holds a 16.3% weight in materials and 9.4% in industrials, and could be used as a hedge against stronger picks focused on domestic demand.
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Source: Emerging Money - GAI
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