--- Mexico's IPC index seen backed by solid growth outlook
Hopes that the new government of President Enrique Pena Nieto will be able to push through major tax and energy reforms that have languished in Congress for years has helped boost equities this year and could keep supporting stocks in 2013. "We are overweight Mexico and a big part of the optimism is not just the index's upside but also the expectation that the reforms will be approved," said Nur Cristiani, an analyst at J.P. Morgan in Mexico City.
Lawmakers in Mexico's divided Congress had been unable to reach an agreement on major economic reforms in the past 15 years. But in November, they passed a landmark labour reform bill that could help spur job growth. The outlook for the IPC index by mid-2013 rose slightly to 44,937 from 44,700 in a poll taken in late September. Mexican equities have been one of the top performing emerging market assets in 2012, up over 16 percent so far.
Foreign investors piled into Mexico this year, with $4.5 billion flowing into stocks from foreign accounts in 2012 by the end of November, compared with 2011 when global investors pulled out $4.9 billion through November. Solid US demand and stronger domestic consumption are seen supporting company earnings next year even as growth slows from around 3.9 percent in 2012 to about 3.5 percent in 2013.
However, Mexico could be hit hard by a failure of United States lawmakers to stave off the "fiscal cliff" of automatic tax increases and spending cuts due to take effect at the beginning of next year. If no deal is reached, the economic shock of the changes could drag the US towards a recession. Mexico sends nearly 80 percent of its exports to the United States and its economy could suffer the most in Latin America.
High valuations could also limit gains ahead. Foreign investors pulled $261 million out of Mexican stocks in November, the first outflow since last December. Analysts also point out that optimism over the chances that the new government will be able to push major tax and energy reforms may have outstripped the real prospects of legislation.
"Petrochemical companies have gotten well ahead of themselves. The energy reform may not come until late 2013 or 2014," said Luis Rodriguez, an analyst at brokerage Finamex. The stock price for plastic pipe maker Mexichem has risen 20 percent since the start of September.
Another factor that could drag on the IPC is the performance of shares in billionaire Carlos Slim's America Movil, Latin America's biggest mobile phone and pay-TV provider. The stock accounts for more than one-fifth of the IPC's weighting. America Movil hit a more than one-year low this month even as the IPC climbed to a record high amid concerns about slowing profit growth at Slim's flagship company and the risk that regulators could undermine its strong position in markets such as Mexico and Colombia.