Mexico has fallen well behind its rival Brazil in attracting equity investors and not even a plan to rejig its benchmark index is expected to add much-needed liquidity to the stock market. Mexico's stock exchange will tweak its IPC index from September 1 to better reflect companies' free float - the percentage of shares that are available in the market.
But investors say the limited free float of many companies in the IPC is just one drawback to Mexico's stock market, which for years has struggled because of a lack of initial public offerings and the dominance of a handful of companies. The Bolsa Mexicana de Valores (BMV) index, which will return to listing 35 names in September from 37 currently, is dominated by Carlos Slim's mobile phone giant America Movil, which currently has a weighting of 24 percent.
That compares with Brazil's Bovespa index, which references 67 different stocks, with the biggest weighting of around 10 percent going to oil company Petrobras. "Mexico has fallen behind Brazil enormously," said Eric Anderson, head of Latin American equities at ING Investment Management in New York, noting that a lower volume of equity issuance in Mexico has also hindered liquidity.
Mexico last week just completed its third IPO this year - including a real estate investment trust - while in Brazil there have been 10 new public offerings, according to Thomson Reuters data. Mexico's stock market has a total market capitalisation of $359 billion, or 41 percent of its GDP, compared to $1.14 trillion or 71 percent for Brazil.
"Mexico has lost some of the relative liquidity attributes it had," said James Donald, a portfolio manager and head of emerging markets at Lazard Asset Management in New York. Donald noted that in the early 1990s Mexico was the second-largest emerging market but since then, countries such as China, India and Brazil have surged past.
The lack of trading volume in many Mexican stocks can also be a barrier for entry to large institutional investors: funds such as Lazard's have minimum liquidity requirements. With so little free float of some firms available, a large investor making a minimum-size purchase could make the situation worse.
A $15 billion fund might have, say, a one percent position in a stock, or $150 million. "So if you like a stock, you could be impacting the liquidity of that stock," Donald said. It is not just investors that are worried about the stock market. "We have a lot of room to improve," said Marco Oviedo, an economic advisor to Mexican President Felipe Calderon.
The government is working on reforms it hopes will bolster liquidity, he said, citing recent efforts to expand the range of investments allowed to Mexican pension funds. The BMV insists that changes to improve foreign investors' access to the stock market have already boosted liquidity.
Average daily volume in the second quarter this year was up 43 percent from the average in 2009, according to BMV data. Changing the IPC to better reflect companies' free floats will also force them to consider the liquidity of their shares and to try to improve it if they want to increase their index position, said Javier Artigas, head of strategy at the BMV.
"It's generating a virtuous circle of liquidity," he said. But as long as many public Mexican companies are largely held by foreign parents - like retailer Wal-Mart de Mexico - and others such as breadmaker Grupo Bimbo are firmly in the hands of founding family members, liquidity will be a problem. High levels of family ownership and the presence of several oligopolies in Mexico have generally discouraged Mexican firms from going public, according to analysts.
Without new names coming to market, the IPC index will remain highly concentrated in sectors such as telecoms. That makes it less appealing, as index concentration means Mexico's stock market does not reflect the overall economy, said Will Landers, manager of BlackRock's Latin America fund.
With the economy closely tied to the United States, stock market investors might like to take views on exporters, but there are few of those in the index, he said. Nor do index changes seem to be encouraging listings, he added. "I would have expected more activity out of the Mexican market at this point but we're just not seeing that," Landers said. "You put all that together and it's kind of a disappointing story."