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Mexican Stocks Will Lag Latam Peers in 2020 Amid Sluggish Growth

Michael O'Boyle

(Bloomberg) -- Mexican stocks are set to underperform emerging market stars next year amid worries about domestic economic policy, sluggish growth and U.S. trade ties.

Mexico’s benchmark IPC index is projected to rise 7% next year to 47,800, according to the median of seven analysts surveyed by Bloomberg. That growth would be in line with the gauge’s performance so far in 2019 after a deal on Mexico’s trade pact with the U.S. and Canada fueled a December rally.

Morgan Stanley and JPMorgan Chase & Co. are among banks that expect Latin America’s second-largest economy will continue to lag growth in Brazil and Colombia, where the main indexes are seen posting double-digit gains in 2020. Mexican stocks ranked eighth in a Bloomberg survey of 57 global investors, strategists and traders on their outlook for next year, behind China, India and Russia.

Investors remain wary of a slump in capital investment under President Andres Manuel Lopez Obrador, who halted auctions of oil drilling blocks to private companies and has focused government resources on reviving state-owned oil company Pemex. Unless he reverses his stance to allow more private investment in energy, analysts think Mexican stocks and the overall economy will remain in the doldrums.

“Energy remains the inflection point to decide on a true sentiment shift,” JPMorgan analyst Nur Cristiani said in a research note this week. “The key to truly unlocking investor confidence? Reopening the oil rounds.”

Mexico’s economy is expected to mount an anemic rebound with growth around 1.1% next year after teetering on the brink of recession in 2019, according to a Citibanamex poll this week. Citibanamex analysts led by Williams Gonzalez said last week that estimates show company revenue will rise an average 6.1% and profits will grow 14% in 2020, with communications, industrial and discretionary sectors showing the best outlooks. Potential gains in the index were not attractive given the risks, the bank said.

Among bright spots, a 20% minimum wage hike next year will make consumer stocks like Wal-Mart de Mexico a good bet, said Rodolfo Navarrete, head of analysis at Mexican brokerage Vector.

But even with a free trade deal in place, Mexico could become a political punching bag for U.S President Donald Trump during next year’s election cycle, Navarrete said. He warned that Trump could revive threats to slap tariffs on Mexican goods. “Trump is unpredictable, and you have to take that into account,” he said in a telephone interview.

Analysts at Santander led by Daniel Gewehr said in a note on Thursday that Mexican stocks are trading at around 13.8 times 2020 estimated earnings, which is about a 16% discount to their seven-year average. But Gewehr said that was not attractive enough to offset the risks from “uninspiring growth” and the “lack of visibility regarding the new administration’s policies.”

While analysts are not recommending broad bets on Mexican stocks, they see opportunity for certain stocks. Both Santander and Itau BBA said energy infrastructure company IEnova was a top pick, with Itau seeing potential for a 30% gain in the stock next year.

JPMorgan favors Mexican stocks that are insulated from the local economy, like industrial real estate developer Vesta, which records revenue in dollars, and Grupo Cementos de Chihuahua, whose U.S. business could benefit from stronger construction growth.

Historically low valuations on Mexican stocks should limit downside, according to Morgan Stanley analyst Nikolaj Lippmann. In his 2020 outlook, he preferred dividend plays like real estate investment trust Fibra Macquarie.

According to Lippmann, even a reopening of the energy sector would have only a modest positive impact. His base case projects the S&P/BMV IPC index will rise to 46,000 points next year while a reopening of the energy sector could help extend gains to 48,000.

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To contact the reporter on this story: Michael O'Boyle in Mexico City at moboyle7@bloomberg.net

To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, Catherine Larkin, Jennifer Bissell-Linsk

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