Rolling with the Punches

Capital Markets

Once the shock of Trump’s victory had settled, investors assessed which markets would buckle under protectionist rhetoric. Yet Trump was not Mexico’s only downer, and when the Bolsa Mexicana de […]

Once the shock of Trump’s victory had settled, investors assessed which markets would buckle under protectionist rhetoric. Yet Trump was not Mexico’s only downer, and when the Bolsa Mexicana de Valores (BMV) benchmark IPC index shed 3.68% in the post-election week, it was its third consecutive loss, with Pemex having made a gigantic USD32 billion loss in 2015. Yet in the capital markets even dead cats bounce, and soon the BMV was being touted as a must-buy since often…

Reality Trumps Rhetoric

On November 7, as polls indicated victory for Clinton, and the benchmark stock index was trading at a high 18.6x estimated earnings, the benchmark IPC index rose 3% to 48,091.15, in its greatest advance since December 2014, with aviation stocks the notable risers. Yet by November 17, the index had shed 16% on widespread concerns that Trump would scrap the NAFTA agreement and move on the remittances of Mexican workers (with an estimated potential cost of 6% to Mexico’s GDP). Then in early March a Mexican wave blew through the BMV, whereby it recovered its post-US election losses, even exceeding its previous intraday record of 48,956.06 of August 2016.

Historically, the IPC Index peaked at49,939.47 in May 2017 and troughed at 14,008.20 in August 2005. Supporting this performance was a robust US economy primed to buy from Mexican manufacturers, and silence on NAFTA. Trump’s rhetoric may well stop short of costing voters more at the mall. In fact, retail provides an excellent example of the BMV’s resilience to noise from Washington. Looking at the shares of Walmart Stores Inc. and Walmart de Mexico, in the year-to-March, while the former had gained just 1%, the latter had appreciated 12% amid confidence in Mexico’s bigger picture. Stabilizing oil prices also played a key role in whetting investors’ appetite. The simple fact is that while Trump’s tub-thumping served as grist for the campaign mill, the US and Mexico have a complex relationship established over decades; one of mutual dependence not easily ditched.

The Bourse at a Glance

Mexico’s sole bourse, the BMV is the largest capital market in Latin America, after Brazil’s BM&F Bovespa. It is also the fifth- largest in the Americas. While Mexico has appealed to investors keen on its high-yielding, investment-grade, and fixed-income assets, the BMV’s overall value by equities remains at a relative low of around 40% of GDP. Essentially, with its performance contingent upon overall sentiment toward EMs, it has benefitted from low prevailing interest rates in advanced economies. A vertically integrated business group, the BMV operates the exchange, as well as the MexDer futures and options derivatives market, the SIF-ICAP over-the-counter (OTC) inter-dealer market for fixed-income and derivatives products, and the custody and settlement and clearing operations. Stocks are apportioned to 13 specialized market indices, and the broadest benchmark index is the IPC, a market capitalization weighted index of 20 to 25 of the BMV’s most highly marketable issuers, with a minimum market value of USD100 million, revised semi-annually. As for 1Q2017, for the total market the daily average value traded, at MXN15.8 billion, was 5% up, while the daily average volume of 294.9 million was down 18% YoY.

Selected Performance

For 1Q2017, BMV’s revenues rose 15% to MXN771 million and expenses by 5% YoY, while net income appreciated 22% to a fresh record high of MXN277 million. EBITDA grew 24% with an EBITDA margin of 57%, breaching a new record high for the fifth consecutive quarter. Operating income of MXN417,897 was up 25% YoY, on an operating margin of 54.2%. In terms of profitability, EBITDA was at MXN436,959, up 24% YoY, on an EBITDA margin of 56.7%. The fact remains though that close to 70% of Mexican states are absent from the bourse, which has curbed interest in Mexico that might have come from its membership of a regional club.

MIL(A) Gracias
The Latin American Integrated Market (MILA) emerged in 2011 as the respective bourses of Chile, Peru, and Colombia joined hands. Already the region’s greatest exchange by number of listed companies, Mexico’s entry in June 2014 doubled its scale, with a combined MCap of around USD1 trillion and close to 1,000 issuers, exceeding Brazil’s Bovespa, historically Latin America’s largest and most liquid bourse. By 2Q016 MCap had reached USD836.271 billion. When MILA’s trading volume soared from USD6.9 million in November 2014 to USD18.8 million a month later, the BVM accounted for almost 80% of the total. As of June 16, 2017 the S&P MILA Andean 40 Index, closing at 668.21, had printed a 1-year rise of 14.76% and 52-week range of 583.23-701.76.

Energetic Thinking

Mexico’s landmark energy reform of 2013 left investors wanting to share in the sector’s spoils. Hearing the demand, keen to ensure that related state-enterprises remained competitive, and wishing to secure fresh financing sources for energy-related projects, the government in 3Q2015 announced a new security to be traded in the capital markets. Enter the Mexican infrastructure and energy trust, or Fideicomiso de Inversión en Energí­a e Infraestructura (FIBRA-E). FIBRA-E sponsor firms effectively securitize portions of their mature oil and gas assets (excluding upstream activities), and energy and/or infrastructure projects, with investors sharing subsequent returns. Related regulation entered into effect on October 1, 2015, sweetening the offer.

IPO? That’s the Spirit

Mexico’s first IPO on June 13, 2008, was a reflexive affair, as the BMV itself went public, with more than 13,600 individual investors buying shares priced at 16.50 pesos each. In 2015 the local market boasted eight IPOs valued at around USD2 billion. An additional USD900 million was issued through real-estate investment trusts (REITs) and the abovementioned infrastructure development funds. Fast forward to February 2017, where glasses clinked as Mexico’s Jose Cuervo, the world’s leading tequila producer raised over USD900 million at its IPO. The stock subsequently soared to an intraday gain of 8% on its first trading day, though ultimately closing 4.9% up.

The event was a useful barometer of market sentiment, having been twice postponed in 2016 at the height of Trump’s rhetoric, as the peso tumbled. And returning to energy, new oil and gas venture Vista Oil & Gas, a special purpose acquisition company (SPAC), in June applied for an IPO. Riverstone, a major private equity backer in the energy sector, and a force behind Vista Oil & Gas, had also formed the Silver Run Acquisition Corp SPAC that went public in 1Q2016, and that printed an MCap of USD4.1 billion within a year. With just one listed energy entity on the BMV, the latest IPO will likely register notable appeal.

Bonding Time

Mexico is the region’s second-largest bond market after Brazil, having burgeoned over the past decade amid greater liquidity. Indeed, the risk of a deleterious effect on the market arouse should the vast amount of foreign investment in government paper be reversed. By 2015 government and government-related bonds comprised the bulk of Mexico’s bond market at 85.9%. Mexico’s 10-year bond closed at 6.87% on June 19, 2017, having historically peaked at 12.24% in September 2001 and troughed at 4.42% in May 2013.

Prospective IPO activity attests to the fact that the BMV seems set for an interesting year, regardless of prevailing headwinds.

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