Mexico’s Stock Market Is Going on a Vicious Cycle

Analysts, investors and Mexican companies’ feelings go beyond economic uncertainty and point to a dramatically undervalued environment.

Given the size of the country's economy, there should be at least 500 companies listed on the stock exchange.
November 02, 2021 | 09:58 AM

Mexico City, Mexico — Mexican stock market is going on a vicious cycle. While companies wait for a more solid market and favorable economic conditions to decide to obtain public financing, the stock exchanges are waiting to strengthen for new competitors to enter the market.

The Mexican stock market has been in a drought of Initial Public Offerings (IPOs) for more than two years and has presented a greater number of delistings due to the lack of economic certainty and lower valuations.

The market cannot offer what the companies are worth, but companies do not want to list because the exit price is not equal to or higher than the companies’ estimates. The lack of new public companies generates a lag in the economy.

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Companies do not see it as atractive to list in the market, but it is not offered what companies are worth in the face of a lower expected economy.

Carlos Gonzalez, Director of Economic, Exchange and Stock Market Analysis at Monex

This is beginning to be recognized by some analysts who suggest that companies should carry out a delisting process due to the lack of market valuation. The most recent case occurred with Bachoco.

In a conference for the third quarter report, Jay Hill, an analyst at Tweedy, Browne Company LLC addressed the issue with the chicken and egg producer: “Their stock is extremely cheap, it’s frustrating to be a shareholder. I suspect their board is also frustrated and also recognizes the very cheap valuation,” he told Bachoco management.

The analyst made a recommendation to the company to repurchase the shares.

Another case is the Monterrey conglomerate Grupo Alfa. The CFO, Eduardo Escalante, referred that it is not within its plans to carry out an IPO that Sigma, its food division, has been prolonging in recent years.

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“The markets, particularly in Mexico, are not recognizing the intrinsic value of the company. We do not plan to do an IPO in the short term of Sigma in Mexico, but it would certainly be an alternative with better conditions.”

In the case of the Real Estate Investment Trusts (Fibras by it´s Spanish Initials), Jorge Pigeon, vice president of Investor Relations and Capital Markets at Funo, told Bloomberg Línea that at least the price of the Real Estate Trust Certificates (Certificados Bursátiles Fiduciarios Inmobiliarios) are trading at half price, since their book value is MXN$45. They are currently trading at MXN$20.

“The market is dramatically undervaluing. It’s a little irrational the way the market is valuing. It’s as if you were buying a building like Torre Mayor, which is worth US$400 million at US$200 million. That’s the price level we are at”.

Tiny capital market

In Mexico, only 0.02% of registered companies are listed in the local capital market.

“Our market, by different metrics, by the size of the economy, should be bigger. Some data said we should have close to 500 issuers,” said Carlos Gonzalez, director of economic, exchange and stock market analysis at Monex.

Mexico’s market capitalization is equivalent to around 36% of the country’s economy; this is the market value compared to the latest Gross Domestic Product (GDP) figure, which, according to analysts, should be higher.

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“There are much smaller stock exchanges, such as Nigeria or Egypt, that have more companies listed than in Mexico and the country is not a small economy,” said Edgar Arenas, Investment Strategies Promotion Manager at CI Banco. He explained that Mexico is the 15th largest economy in the world, “but the stock market is small and generates economic lag”.

José-Oriol Bosch and María Ariza, the directors of the Mexican Stock Exchange (BMV) and the Institutional Stock Exchange (BIVA) allude that the lack of new companies is a consequence of structural problems or the lack of space to compete. But even with a new competitor, a price reduction of up to 50% and better market valuations have not been enough.

The very nature of the market is to register the entry and exit of companies from the capital market, however, the balance has been weighted more on the side of exits than entries.

According to data gathered by Bloomberg Línea, there are close to 17 companies that have requested their delisting in the last seven years. Among them Grupo Modelo, which exited due to the acquisition of beer maker AB InBev.

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“It is likely that many public companies have found three relevant incentives to delist or postpone exit plans: 1) financing amounts that do not meet the outlook 2) postpone payments or fixed costs related to being a public company 3) revisions of strategic plans until an environment of greater certainty,” said Carlos Hernandez, senior analyst at Masari Casa de Bolsa.

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Other companies that requested to exit the BMV were Maseca, which received authorization from the National Banking and Securities Commission (CNBV), Consorcio Hogar, the cookie producer Mac’Ma, Ingeal and Rassini.

Arenas mentioned that local investors are concentrating their attention on companies that have been integrated to the International Quotations System (SIC), reducing the possibility of attractiveness for local companies.

He pointed out that, with the entry of new instruments in the global market, it was expected that investors and companies would feel encouraged to participate in the local market, “but this has not happened and it has become smaller. Lack of certainty is one of them, if there is something that issuers and investors like is to have a legal framework that makes them feel solidand comfortable in the stock market”.

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The market lacks regulatory incentives, said the investment advisor, and reiterated the size of the issuers listed on the Exchange compared to the more than 3,000 securities registered in the SIC.

The Mexican market is complicated, those who are inside want to get out and do not push those outside to get in.

With information from Michelle del Campo