Mexico Equity Drought Deepens Under Lopez Obrador’s Watch

(Bloomberg) -- Mexico is sinking deeper into a decades-long initial public offering funk even as world markets see a record number of new listings.

Companies around the world have raised $120 billion in initial stock offerings, according to data compiled by Bloomberg, the busiest start to a year on record. In Latin America, new listings in Brazil could surpass last year, the market's best in a decade. Mexico, meanwhile, has not seen an IPO that nears $1 billion since late 2017. And the road ahead looks pretty dry, local bankers say.

While Brazil and U.S. stock markets have posted record on top of record since 2017, Mexico's benchmark index is still well off its highs from that year, and that is discouraging companies from coming to market.

Last week, a Mexican REIT raised around $330 million in the first equity offering of the year. The only other issue on the horizon is a set of toll roads in another REIT-like structure that will launch sometime this year.

One of the biggest factors hanging over Mexico's economy and stock market has been the populist policy shift under President Andres Manuel Lopez Obrador, which has crimped business confidence among some investors.

Uncertainty will likely mount ahead of state and congressional elections later this year, where his party could consolidate power, Citibanamex said in a report. The bank projects the IPC index will fall nearly 8% by mid-year and end 2021 about 1% below its Friday close.

Policy uncertainty is pushing Mexican companies to slow investments, said Pablo Riveroll, who manages Latin American stocks for Schroeders Plc. He doesn't see big companies coming to the stock market over the next year or two. “The Mexican business community is quite cautious, if anything they are investing less,” he said.

While it would be easy to blame Lopez Obrador's conflicts with the business elite for the IPO drought, there are also structural issues that have been undermining the market for decades, Riveroll said.

First, there is a supply problem. Most Mexican industries are dominated by a handful of companies. There is one big player in each of the milk, bread, cement and phone sectors, a couple of Coca-Cola bottlers, two television networks and two big miners. Out of the top 20 biggest companies in Mexico today, only four are new from a decade ago. In Brazil, eight companies have risen into the top 20 over the same period.

Mexico has reared just one of the world's 546 unicorns, or private companies worth more than $1 billion, compared to nine in Brazil and 25 in India, according to data compiled by CB Insights.

“It's not because our entrepreneurs are stupid, it is because there aren't the right incentives to grow,” said Jorge Gordillo, head of analysis at Mexican brokerage Ci Banco. Lack of competition is the main factor that has capped Mexican GDP growth to an average around 2% during the last two decades, he said.

There is also a demand problem. Local pension funds have cut their holdings in Mexican stocks from around 10% of their portfolios to 5% during the last decade as they increased allocations into foreign stocks, Santander analyst Alan Alanis said in a report this month. That could change over the next decade as higher business contributions to worker accounts kick in following a reform from late last year. Alanis projects pension funds could eventually invest an additional $15 billion into Mexican equities over the next seven years.

Shallow Markets

Meanwhile, Mexico lacks the growing local hedge fund industry and retail investor market that has helped propel new offerings in Brazil. With less local demand, companies in Mexico need to reach valuations of around $1 billion to be able to attract enough international investors to make their listings viable. There aren't many companies of that size that want to go public, Gordillo said.

There are some signs of life, however. Mexico saw its best quarter on record for Series A private equity fundraising, mostly due to the $65 million investment by General Atlantic and others in online grocer Justo earlier this month, according to data compiled by Bloomberg. Atlantic is also backing payments startup Clip, along with SoftBank Group Corp., which has also funded used-car platform Kavak -- the one Mexican unicorn.

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