On the Money

By JOHN ROTHCHILD

What is it with the peso crisis south of the border? Are we talking about a brief time-out in the hat dance of prosperity or a massacre at the investors' Alamo? If you listened to your broker a few months ago and bought Telefonos de Mexico, Cifra or Grupo Televisa -- or shares in a Mexico mutual fund -- should you be jumping out or staying put?

I posed this question to financial globetrotter Jimmy Rogers, who dispenses advice on CNBC. Until very recently, Rogers was "short" on Mexico -- betting against it -- so last week's events made him a happy man. He has cashed in his shorts, and he's neutral at the moment, neither buying nor selling, just biding his time. Rogers advises that people who own Mexican stocks should hold onto them because otherwise they'll be feeding the bargain hunters.

Could Mexican stocks go lower? John Templeton says they could. The founder of the Templeton Funds has retired after 40 years in the business, and he was investing globally long before his peers even gave it a thought. So he has seen a lot of market drops, but he can recall only one case in which the prices bottomed out in the first week. That was in the U.S. -- after Black Monday, Oct. 19, 1987. The dean of foreign investing wouldn't be surprised if the Mexican Bolsa heads lower before it heads higher.

That it will head higher eventually he doesn't doubt. Right now, a lot of people are nervous about the high inflation that often follows a currency devaluation. But Templeton reminds us that not all Mexican companies will be hurt if the government fails in its attempt to restrain prices. Even if a company's costs go up, it can in turn raise the price of whatever it's selling and still make its usual profit.

No wonder, then, that the Mexican analyst for the Templeton Funds, Ed Ramos, has put out a buy recommendation on several Mexican companies that he thinks are already irresistibly cheap, including Tel-Mex, the big phone company that's in so many portfolios.

Even Marty Zweig, Wall Street's most notorious worrier, isn't worried about the Mexican market. He's too busy worrying about the U.S. market, which he believes is dangerously overvalued in an environment of rising interest rates. But Zweig directed me to the Mexican analyst who is highly touted by his trading desk: Caoimhe Royds of Natwest Bank in London.

Royds isn't rushing out with buy orders the way Ramos is, however. Her view is that Mexican stocks may be cheap but that at the moment there's no way to tell. The peso crisis has thrown all the best-laid economic forecasts out the window, so the educated guesses on next year's growth rate, inflation rate and interest rates have become wild guesses. So much is up in the air, in fact, that it's impossible to make predictions about corporate earnings, and as everybody knows, if earnings are a mystery, you can't possibly say whether a stock is cheap.

Ultimately, Royds too is an optimist on Mexico, and for quite an interesting reason. "I don't believe Mexico will be allowed to go wrong," she says, alluding to the vast amounts of foreign money invested there. What the press has reported as a negative -- two-thirds of Mexican stocks owned by foreigners -- she regards as a positive. The U.S. can't afford not to bail out Mexico, and late last week, it offered to do just that with a $7 billion emergency slush fund.

So in general there's more panic in the headlines than in the minds of investment pros who follow Mexico. It's been only three years since Americans became big-time investors in the emerging markets, and we've learned some useful lessons already. The first is that emerging markets are particularly jumpy, with 200% gains one year and 60% drops the next -- as we've seen, for instance, with Turkey. And the drops get far more attention than the gains. Who remembers that the recent 30% fall in the Mexican Bolsa was preceded by a 70% rise in the NAFTA year of 1993?

The second lesson is that a crisis can come out of nowhere and land your favorite emerging market on the front pages. Then you read about all the people who saw it coming. If they saw it coming, then why didn't they raise the alarm beforehand?

In fact, the Mexico in this week's editions sounds like a different country from the one we heard about in August. Then it was a land of plenty, a healthy economy, a sophisticated nation managed by a savvy bunch of Ivy Leaguers who had the full confidence of the world's financial markets. Now it's a heap of trouble, a basket case, a sick economy that's managed by a gang of double- talking bumblers.

The third lesson is that the fate of countries big and small rests in the hands of currency traders, who have suddenly become the most powerful and warlike tribe on earth and can throttle a banking system at will.

The fourth lesson is that you can lose money in foreign bonds, bond funds and money-market funds as fast as you can lose it in foreign stocks. You've got the same currency risk and market risk, but none of the upside if the market goes your way. So if you want to invest globally, you're better off in stocks -- Mexico's included.