Citi Cuts Mexico Equity, Raises Brazil

Citi has cut its valuation of Mexican equity to underweight and increased overweights in Brazil and Chile. “With the Bolsa now through our end-2007 index target of 29,000, we downgrade Mexico to underweight from neutral based on: 1) an over-reaction to recent progress on reforms; 2) rich valuations; and 3) the slowing economy, which should translate in time to negative earnings momentum,” says the shop in a research report. It cautions that the main near-term risk to its bearish call is that Q1 results are again strong and says that earnings disappointments may not start until next quarter. “We would sell into any new rally during the upcoming results season,” says Citi. It sees no tangible short-term benefit for the Mexican equity market from the recently passed public pension reform. To position defensively, Citi drops Televisa and Asur from its regional focus list and adds Alsea. Sector overweights in Mexico are telecoms and consumer staples. In Brazil, Citi remains overweight in financials, consumer staples, and telecoms, with a neutral in energy and underweight materials.