Upward trajectory: Market performance opens door to greater internationalisation

The Mexican economy has been going through a period of significant development. There is a large degree of optimism both domestically and on the international scene. After being in the shadow of the BRICS countries (Brazil, Russia, India, China and South Africa) over the past few years, Mexico is back in the spotlight. Macroeconomic stability, optimism about structural reforms, and an improvement in the credit rating from international agencies have been attracting foreign capital and making financing cheaper for the government and companies alike.

For Juan Guichard, the CEO of INVEX Grupo Financiero, low macroeconomic volatility, stable exchange rates and efficient management of the economy and public finances are the factors behind the growth of the capital markets and the record number of initial public offerings (IPOs) announced in 2013.

With the second-largest stock exchange in Latin America, the recent performance showed not only growth in volume and value, but also the creation of new and more sophisticated instruments, although a fairly conservative profile of companies and investors still prevails. Another recent highlight is the impressive growth of pension funds and the importance they have gained for the development of the markets.

Regulatory Bodies

Mexican capital markets are regulated by the National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores, CNBV), an autonomous entity and one of the branches of the Secretariat of Finance and Public Credit ( Secretaría de Hacienda y Crédito Público de México, SHCP). CNBV is the agency responsible for regulating and supervising the country’s financial markets (securities, derivatives, brokerage firms, securities issuers and investment funds), banks and credit intermediaries.

Market Participants

There were 33 brokerage firms operating in Mexico as of December 2013. Casa de Bolsa Banorte-Ixe held 22% of assets, worth MXN116.3bn ($9bn), well ahead of the next four largest brokerage firms, Casa de Bolsa Finamex (8.8%), Valores Mexicanos Casa de Bolsa (8.3%), Accival (7.4%) and Vector Casa de Bolsa (7.3%). From 2012 to 2013, total assets under brokerage control increased by 12.4%, reaching MXN527.4bn ($41bn).

In January 2014, there were 63 investment fund management firms, administering MXN1.65trn ($128.21bn) in assets distributed among 570 investment funds, 48% composed of variable income instruments and 52% of fixed income. From December 2012 to December 2013, five new funds were launched and the volume of assets went up from MXN1.49trn ($115.77bn) to MXN1.63trn ($126.65bn), growth of 9.4%. The largest fund manager is Banamex, with MXN437.2bn ($34bn), or 26.5% of the total, followed by BBVA Bancomer, with MNX337.5bn ($26.2bn), and Banco Santander (México), with MXN197.8bn ($15.4bn). As the numbers show, there is a high degree of concentration, with these three managers holding 59% of segment assets. Pension funds are also important actors in the market (see analysis).

Listen Companies

In March 2014, there were 142 firms listed on the Mexican Stock Exchange (Bolsa Mexicana de Valores, BMV), with seven firms having been added between December 2012 and December 2013. Companies from the financial services sector are the majority, with 33 companies listed (24%), followed by the industrial sector (22%) and materials (16%).

The equity market comprises the domestic market and the Global BMV Market (known as the Global Market). The Global Market was created in 2003 and is a mechanism that allows Mexican investors to buy and sell foreign securities through the BMV. Its operations are under the regulatory and trading scheme of the International Quotation System (Sistema Internacional de Cotizaciones, SIC).

The Global Market is comprised of 870 issuers, 827 of variable income securities and 43 of fixed income, and 934 listed securities, including 452 exchange-traded funds (EFTs), 376 equities and 106 debt instruments. Although the SIC includes securities issued by companies from across the globe, most of these are listed on markets in the US or in other key centres such as London, Frankfurt and Toronto.

To make it easier for companies to go public, a more flexible type of public company was created, the listed investment promotion stock company (Sociedad Anó nima Promotora de Inversión Bursátil, SAPIB). SAPIBs have more flexible listing criteria than regular listed firms, such as lower requirements for the number of shareholders and total working capital. The new option is expected to function as a first step for companies, which receive up to three years to meet the requirements for becoming a regular listed company. Despite the incentives, there were no SAPIBs listed on the BMV as of February 2014. “It is estimated that Mexico has 200,000 securities accounts,” Rodrigo Ocejo, founder and CEO of online broker Kuspit Casa de Bolsa, told OBG. “Of these, about half are corporate accounts, leaving some 100,000 individual accounts, of which many are duplicate and not all are active. The fact that one of the 15-largest economies in the world has this low figure of securities accounts is a matter of concern that should be the subject of further study.

Market Transactions

In 2013, the volume of shares traded on the BMV was 96.4bn, reaching a value of MXN3.63trn ($282.05bn), and up 8.3% on 2012. The volume of operations in the domestic market was 94.8bn with a value of MXN2.91trn ($226.11bn), 9.3% higher than in 2012. The Global Market saw a higher increase, going from MXN513.4bn ($39.9bn) in 2012 to MXN717.5bn ($55.7bn) in 2013, a rise of 40%.

Despite its smaller share of total transactions, from 2003 to 2013 the Global Market increased by an annualised rate of 76% in value and 77% in volume against 27% and 18% for the domestic market. Moreover, although the volume of shares traded in the Global Market still represents less than 2% of the total, the total value traded gained more importance going from around 1% in 2003 to 20% in 2013. Furthermore, in 2013 the increase in the value traded on the Global Market represented 45% of the total growth.

Expanding Horizons

Another channel for the internationalisation of the BMV could be the Latin American Integrated Market (Mercado Integrado Latinoamericano, MILA), a joint stock exchange that integrates stock markets from Peru, Chile and Colombia. Mexico has already signed an agreement to join MILA, which could occur in 2014. Although seen as something very positive in a broad sense, its potential benefits are not yet clear. Jorge Arce, chief country officer for Deutsche Bank Mexico, told OBG that, with a mechanism like the SIC, Mexico-based investors already have the ability to invest in global securities in many listed stocks in most major jurisdictions. Meanwhile, Jose Ignacio El-Mir Arnedo, from the Capital Markets and Accounting Advisory Services division of PwC México, believes that although MILA is in its early stages of development, it could gain more importance in the mid-term and that regional alliances are necessary to be a relevant player in the world economy.

BMV also allows double listing, which means a company can list simultaneously in Mexico and in another stock exchange. Santander, the Spanish parent of Banco Santandar (México), is the only company double listed, with its stocks traded in both New York and Mexico. According to José Antonio Quesada, senior partner for clients and markets at PwC México, the lack of double listings can be explained by Mexican companies’ general concern about information disclosure. “Double listing means complying with international standards of disclosure, so domestic companies are still reluctant to embrace it,” he told OBG. However, Quesada acknowledged that Mexico may be going through a process of generational change in the people who control companies, and new owners may be more willing to go to capital markets.

This conservative profile is not restricted to companies. For Manuel Molano, deputy director of the Mexican Institute for Competitiveness, Mexican firms should rely more on equity than simply on borrowing. They have to accept partners to share risks and gains, he said. Investors, in turn, should diversify investments towards riskier and more sophisticated instruments. BMV is still comparatively small for the size of the economy and it is necessary to convince both investors and companies to make better use of capital markets. Mexico has campaigns to promote financial education but it should be public policy, added Molano.

Indices

The main index of the BMV is the Price and Quotation Index (Índice de Precios y Cotizaciones, IPC), composed of 35 companies. The company with highest weight in the IPC is América Móvil (16.17%), followed by FEMSA (10.37%), Grupo Financiero Banorte (9.08%), Cemex (8.28%) and Televisa (8.06%). Combined, they represent 52% of the index. Throughout 2012 the index fell 2.24% from 43,706 to 42,272 points. During 2013 it reached its peak in January (46,075 points) and its lowest value in June (37,043). By December 2013 the IPC had recovered to 42,727 points, dropped 6% in early 2014, but was back to 41,975 in mid-May.

Of the main stock price indices, the one with the best performance (14.2% growth) was the IMC30, which encompasses medium-sized listed companies. Meanwhile, although not alone in showing a loss, the IPC was the index with the poorest performance.

From 2012 to 2013 the market capitalisation in US dollars of the BMV remained stable (-0.2%), going from $525bn to $526bn. In March 2012, it reached $558.4bn, the highest of the year, and August saw the lowest value ($477.4bm). In 2014, following the low performance of the IPC, it fell 9.9% in the first two months.

Regional Comparison

Compared to its Latin American peers, in December 2013 BMV’s market capitalisation was second only to Brazil ($1.02trn) and was around twice as big as Chile’s, the third-largest, with $265.1bn. Colombia’s market capitalisation stood at $202.7bn in December 2013, with Peru holding claim to the fifth-largest bourse in the region, at $80.9bn. Regarding the 2012-13 performance, the other four countries’ regional leaders had large decreases on their market capitalisation values, Chile, with -15.4%, had the smallest decrease and Colombia the largest (-22.7%). In terms of the number of companies listed in December 2013, Brazil was in first position with 363 and Mexico, with 143, lags behind Chile (306) and Peru (271). In total value traded, Mexico was the second-largest in Latin America, with $168.3bn, a volume smaller than Brazil’s $810.2bn, but well above Chile ($46.8bn), Colombia ($25.9bn) and Peru ($4.9bn).

Regarding EFTs, Mexico had the highest number listed (469) and turnover ($101bn) in 2013. Its volume was almost nine times higher than Brazil’s ($11.3bn) and more than the other Latin American countries combined (including Brazil). As mentioned before, 48% of the securities listed on the Global Market are EFTs. Restricting the comparison to the five largest stock exchanges, even with a negative performance (-2.24%), the IPC outperformed the others with the lowest decrease over 2012. The Peruvian stock exchange had the highest decrease, dropping 26.2%.

In 2013, there were 13 public equity offerings reaching MXN107.6bn ($8.4bn) compared to seven offerings and a total of MXN90.9bn ($706.3m) in 2012. Thus, it was a good performance both in number of issuances (86% growth, the highest in the past 10 years) and amount placed (18% growth). The highest issuance was made by Grupo Financiero Banorte with MXN32bn ($2.5bn), 29.8% of the total and more than twice the size of the issue by dairy company Grupo Lala, the second-highest with MXN14bn ($1.1bn) and Grupo Financiero Inbursa with MXN12.5bn (971.3m). Of these, nine were IPOs that, combined, raised $4.8bn.

For Luis Téllez Kuenzler, chairman and CEO of the BMV, 2013 was a remarkable year for IPOs, not only because of the high number but also because of the diversity of sectors. “Companies are increasingly seeing the BMV as a reliable and efficient source of capital. Despite the low growth verified in 2013, prospectives are very positive, otherwise there would not be so many companies going public,” he told OBG.

Real Estate

The BMV also trades instruments designed to finance specific kinds of projects. The more important type is the real estate investment trust (REIT), referred to as a Fideicomiso de Infraestructura y Bienes Raíces (FIBRAs) in Spanish. FIBRAs are trusts designed to finance construction or acquisition of real estate with the goal of leasing or receiving rental income from the properties. They can be purchased by both small and institutional investors and pension funds. FIBRAs are considered hybrid instruments (fixed and variable income), since holders receive periodic payments (from the lease) and can yield capital gains, since they can be traded on the secondary market.

In 2013 there were six public offerings of REITs for a combined value of some MXN52.4bn ($4.1bn), double the number seen in 2012 and 88% higher in value over the year. The biggest issuance was from Fibra UNO, with MXN22bn ($1.7bn), or 42% of the total, followed by the launch of Terrafina, sponsored by Prudential Real Estate Investors, with a MXN9.5bn ($738.2m) issue. Currently, there are seven FIBRAs listed on the BMV. Two of them invest in industrial buildings (FIBRA Macquarie and Terrafina), two in hotels (FibraHotel and fibra inn), one in retail (Fibra Shop) and two in diversified types of properties (Fibra UNO and Fibra Danhos).

Given the increasing interest in REITs, in September 2013 an index was created to monitor their performance, the BMV FIBRAs, composed of the seven FIBRAs listed on the BMV. That index increased 1.5% from 2012 to 2013, reaching 207.8 points. Everardo Caro, director of certification and systems of the Mexican Association of Stock Exchange Intermediaries (AMIB in Spanish) believes FIBRAs are instruments that fit the needs of the Mexican economy well and expects four new issuances of FIBRAs in 2014. About FIBRAs, Guichard told OBG, “In Mexico, unlike in many other countries, the real estate sector was originally under-funded, but today sourcing finance is no longer a problem. The culture of debt has always been peculiar because of our high and almost unaffordable interest rates. Once a market to finance such investments has been created, a door for companies to leverage has been opened, paving the way for FIBRAs to appear and succeed.”

Derivatives

Derivatives are handled through the Mexican Derivatives Exchange (Mercado Mexicano de Derivados, MexDer), created in 1998. The volume of operations on the derivatives market was 27,355,128 in 2013, reaching a notional value of MXN3.4trn ($264.2bn), of which 99% was on the futures market and 1% were options. Currency derivatives were the most important instruments, representing 50% of the total operations and 52% of value, followed by interest rate derivatives (44% and 36%) and equity index derivatives (4% and 12%). Despite the 34% increase in the value of currency derivatives from 2012 to 2013, a 62% fall in value of interest rate derivatives and a 4% drop in equity index derivatives led to a decrease of 30.8% on the total notional value in the same period. Over the past 10 years, 2013 had the lowest total volume and value of operations. According to Chávez, before the 2008-09 economic crisis, the Mexican derivative market was well-developed in volume and in the sophistication of instruments. With the crisis and the problems faced by companies and banks, regulation became more rigid and companies and banks tightened their risk analysis. Since then, traditional instruments such as foreign exchange and equity index derivatives have prevailed.

Debt Market

There were 984 debt issuances in 2013, 136 (14%) medium- and long-term instruments and 848 (86%) short-term. The total value issued was MXN633bn ($49.2bn), with medium- and long-term debt accounting for MXN280.2bn ($21.8bn) and short-term for MXN352.8bn ($27.4bn). Thus, despite the much higher number of short-term operations, when it comes to value, the difference was not so high. From 2012 to 2013, issuances increased by 10% in volume but, although there was 18.5% growth on medium- and long-term debt, the 13% reduction on the value of short-term led to a 1% reduction on the total.

Outlook

There is a positive forecast for Mexican capital markets, with high liquidity and more companies willing to go public. However, there is also a lot of work to be done, especially in terms of attracting an extensive range of new players. “The Mexican market is still very concentrated in large-cap companies and it should be more diversified, with more names and many more industries involved,” said Jaime Álvarez, chief investment officer at Principal Financial Group.

“There is no lack of capital, the pool of investment is very large, so major companies can get all the capital/financing they need, which was not the case 25 years ago,” Arce told OBG. For him, domestic banks are the group with the highest potential to seize the opportunity provided by the favourable circumstances. “Mexicans and international investors want the ability to have pure Mexican players. Major Mexican banks such as Banorte, Santander (México) and BanRegio offer one of the best means to do just that,” he told OBG.

Despite the modest economic growth in 2013 and the poor performance of the stock market in the beginning of 2014, the broad picture shows a positive outlook. Mexican capital markets are more liquid than ever, and investors, especially pension funds, are eager for higher yields and seem more willing to assume the risks associated with such a strategy. With sound regulations, acknowledged by investors and companies, the medium term points to a larger and more mature market.