Investors Bemoan Mexican Stock Exchange’s Low Share Liquidity As More Companies Delist

Around 74% of the companies listed on the BMV are considered to have shares of low liquidity, creating a vicious circle that, due to the lack of investors, discourages investment in shares

Mexico's stock exchange (BMV).Photographer: Susana Gonzalez/Bloomberg
August 09, 2022 | 06:55 PM

Mexico City — Not only does the lack of Initial Public Offerings (IPOs) affect the Mexican Stock Exchange (BMV), but the low liquidity of shares limits their attractiveness for investors, although there is a window of opportunity that could increase the number of companies interested in recurring to the BMV to raise capital, according to analysts consulted by Bloomberg Linea.

“It doesn’t help that there is low liquidity, which does not aid the market’s attractiveness,” said Luis Gonzali, co-chief investment officer at Franklin Templeton Investments.

A stock’s liquidity refers to how rapidly shares of a stock can be bought or sold without substantially impacting the stock price. Stocks with low liquidity may be difficult to sell and may cause investors to take a bigger loss if they are unable to sell the shares when they want to.

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Low liquidity occurs when an issuer’s shares show little activity and therefore low volume, meaning that such shares tend to show abrupt price movements with little movement due to the lack of transactions.

According to Gonzali, the market seeks to lower transaction costs, since a high volume lowers costs; and there is price discovery, or setting of an adequate share price, which means that securities can move and adjust to news or movements in general.

There are only 35 companies listed on the BMV that are considered to have high liquidity, of which five account for 60% of the weight on the entire stock market due to their high capitalization value. The remaining 74% are considered low-liquidity, according to BMV data.

However, “the stock market is an important source of financing where medium-sized companies can always take advantage of”, according to Valentín Mendoza, associate director of equity research at Actinver México.

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A shrinking stock exchange

So far this year, three companies have requested to be delisted from the BMV: Airline Grupo Aeroméxico announced that it is in search of a more liquid market, as did poultry giant Bachoco and, most recently, retail giant Grupo Sanborns, the latter part of the business empire of billionaire magnate Carlos Slim.

The desertion also takes place during a drought of IPOs on the exchange, which has now been going on for almost five years.

Four years since the entry of a new player, the Bolsa Institucional de Valores (BIVA), the companies that have listed on the market have shown few movements.

“Work must be done to increase the investor base so that these companies’ shares are more marketable, that there is greater depth, and that the value they have is recognized,” according to Carlos Gonzalez, director of stock market analysis and strategy at Monex.

One of the reasons for the low marketability of companies’ shares is the low number of shares sold to the market, since most of them are in the hands of family members who do not want to lose control of their companies, he said.

Nearshoring: A window of opportunity?

The problem of the Mexican stock market is structural, and it is even going in a vicious circle due to the lack of investors, as they are not interested in the local market because of the lack of companies trading. In turn, companies do not want to enter the market due to the low number of investors.

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However, economic change generated by the arrival of new companies through nearshoring could provide an opportunity for the stock market, according to Mendoza.

“With the nearshoring momentum we are experiencing in the economy, I don’t know if we will eventually see more and more names or options of companies that might be looking to raise capital to take advantage of such opportunities,” he said.

In contrast, Franklin Templeton’s Gonzali said such a growth opportunity is unlikely, as these are foreign or internationally listed companies looking to be part of the supply chain in Mexico, or to be close to the target market, which is the United States.

“I don’t think that if nearshoring increases, the number of participants in the market will increase,” he said.

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One company interested in listing on the BIVA is Globcash, the operator of Casa Mazatlán.

The company’s IPO has been postponed for September 13 however, according to its placement prospectus.

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