LATIN AMERICAN MARKETS: Mexico Leads Regional Sell-off On Swine Flu

By Carla Mozee

Mexican equities slid Monday, leading a downturn among Latin American markets as investors assessed the impact and scope that a deadly outbreak of swine flu will have on the region.

Mexican stocks also remained in the red, but off their worst levels of the session, in the wake of a 6.0 earthquake hit 200 miles south of Mexico City, according to the U.S. Geological Survey.

Mexico's IPC fell 3.3% to 21,827.11 and gave up as much as 5% during the session. Shares of Mexican market heavyweight America Movil (AMX) dropped 2.3% and lost nearly 9% earlier in the session.

Brazil's Bovespa index lost 2% to 45,819.71 and Chile's IPSA fell 0.7% to 2,661.65. Argentina's Merval turned lower, slipping 1% as shares of market heavyweight Tenaris (TS) lost grip of gains to fall 0.5%.

The swine-flu outbreak, which started in Mexico, has now killed 149 there, according to Mexican health officials, and 776 remain hospitalized. The Calderon administration late last week shut down museums, government-run theaters and other public places, and has distributed surgical masks in an effort to help limit the spread of the illness.

"Unfortunately, Mexico is having this problem in the biggest city in terms of population," said Alfredo Coutino, director of Latin America at Moody's Economy.com, in a telephone interview Monday.

Mexico City makes up 20% the country's gross domestic product, and GDP was $990 billion in 2008, he said.

The World Health Organization late Monday raised its pandemic alert level for swine flu by one notch to phase 4. A phase 4 alert is defined as sustained human-to-human transmission that causes "community-level outbreaks." In the U.S., 40 cases of swine flu have been confirmed.

The swine-flu outbreak comes at a vulnerable time for Mexico, which is already struggling in recession, largely stemming from the weak economy of its largest trading partner, the United States.

Meanwhile, Monday's earthquake shook tall buildings in Mexico City, according to media reports, but no injuries or significant damage have been reported.

In Mexico City, shares of retailing giant Wal-Mart de Mexico (WMMVY) tumbled 6.6%, beverage maker Femsa (FMX) fell 4%, brewer Grupo Modelo dropped 8.9% and baked-good maker Bimbo fell 4.3%.

Shares of airport operators fronted the decline on the IPC. Grupo Aeroportuario del Centro Norte (OMAB) dropped 11% and Grupo Aeroportuario del Pacifico (PAC) tumbled 13%.

In Sao Paulo, shares of air carrier TAM (TAM) fell 6.1% and rival Gol (GOL) lost 2.4%.

"Considering that the swine flu could affect demand in the airline industry, we believe that TAM will likely report weaker operational results compared with those of GOL, given TAM's higher exposure to international business," wrote transportation analyst Victor Mizusaki at Itaú Securities in a note Monday.

As well, fears about animal-borne diseases usually reduce demand for protein in the early stages of an outbreak, said Itau Securities' consumer goods analyst Juliana Rozenbaum.

Brazilian meatpacker JBS would be the most likely affected of meat suppliers, she wrote, "because almost 12% of its sales are U.S.-domestic market pork sales," through Swift Foods Co., which it acquired in 2007.

JBS shares tumbled 12%, their biggest percentage loss since Oct. 9.

Itaú expects rivals Sadia (SDA) and Perdigão (PDA) "to suffer little because we do not expect industrialized pork volumes in Brazil (ham and sausages, among others) to drop as a consequence, especially if the country is not infected."

Shares of Sadia rose 7.8% but Perdigão finished 1.3% lower.

Mexican currency hit

Mexico's currency was also slammed as swine-flu concerns grew, leaving the currency down 4.4% at 13.945 per U.S. dollar.

While illness-related deaths have spooked some investors, Ignacio Goni, head of Latin American research at Riedel Research Group, said Monday that others have used the outbreak as an excuse to take profits off the table, noting a strong run in Brazilian equities in recent week.

Last week, the Bovespa logged its seven weekly win in a row.

"I'm seeing the financial markets react a bit too quickly," said Ignacio Goni, head of Latin American research at Riedel Research Group. The outbreak is a concern, "but at this point, it's too early to [determine] the scale and the consequences," on the Mexican economy and the region as a whole.

Other factors were also at work in the markets on Monday. UBS downgraded Mexican stocks because of valuation, and investors were also watching for a wave of quarterly results from some of the region's biggest companies this week.

America Movil's first-quarter results are due later Monday.

The flu outbreak and its impact on the economy may be a consideration of Mexican central bank officials when they released their updated forecast for GDP and inflation on Wednesday. Government officials currently expect a 2.8% contraction in activity this year.

Standard & Poor's on Monday said the outbreak of swine flu won't have a direct or an immediate impact on ratings on Mexico's ratings.

"However, depending on the severity and length of the outbreak, it presents potential additional downside risk to an already deep contraction in economic activity this year," said S&P credit analyst Lisa Schineller in a statement.

S&P currently expects the economy to shrink at least 3% this year.