Positive growth prospects: fourth quarter 2004, strong oil prices boost outlook.

While rising interest rates could turn out to be a growing challenge to the amazing success of the Bolsa, the equity market will most likely continue its torrid acceleration toward higher valuations.

A long list of factors, such as oil prices and a firm U.S. economy, have joined forces to produce a very bullish environment for Mexican capital markets. The peso had broken through a psychological barrier at the time of writing, dropping below 11 on dollar exchange boards. Oil prices, which have once again reached all-time highs, are pointing toward higher-than-expected future government revenues.

The prospects for a strong Mexican government financial base, combined with the equally positive expectations of U.S. economic growth, are cause for general market confidence. As an equity trader recently remarked: "This is becoming less of a coincidence. It's become quite clear that Mexican markets are tracking U.S. markets over increasingly longer periods of time." Furthermore, the trader continued, "This correlation not only affects the positive growth aspects but also the negative, primarily inflation-induced interest rate concerns."

Both Mexico and U.S. economic authorities have raised the yellow flag recently regarding inflation prospects.

With the authorities in the mood to raise rates, a fresh factor will soon have a growing impact on the capital markets--higher yields in the bond markets will most probably siphon cash away from equities into fixed yield. But even so, corporate Mexican performance during the fourth quarter of 2004 is providing investors with good reasons to stay invested in stocks.

Stock Success Stories

Most sectors of the Bolsa recently reported outstanding fourth-quarter results. At a glance, we note some success stories. Femsa, with one of the strongest stock movements this year, reported strong figures, with many of its individual units performing very well. A quick look at the Oxxo convenience chain--a unit of Femsa--reveals a 26.1-percent increase in revenues during the last quarter of 2004. The stock, at the time of writing, was up over 14 percent this year.

ICA, the construction conglomerate, surprised the market with better-than-expected Q4 results. Its revenue increased 38 percent, considerably higher than most analysts were expecting. Its stock is up 10 percent this year.

The telecommunications sector--which dominates the Mexican stock exchange weightings--reported strong results throughout 2004. According to a Cofetel statement in early March, the Mexican telecoms sector grew 22.6 percent in 2004. The cellular market "minutes of use" grew 44 percent. Fixed-line growth came in at 10.2 percent during the past year--the highest growth rate in years.

Recently America Movil (AMX), the most important listing on the Mexican exchange, proposed a 3-for-1 share split that will most likely encourage more buyers. And a few brokerage houses have increased their price targets for America Movil, with one important broker raising its target by US$11 per share.

Fourth-quarter economic and corporate data have also set a positive tone for the market thus far this year. Recent consumer confidence numbers reached their highest level in two years.

With the peso showing signs of strength and future interest hikes expected, the Mexican market should enter a period of hesitation and correction. But this could be short lived.

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And with local pension funds becoming more aggressive, the market will find itself less and less vulnerable to international investors. Wall Street growth estimates for Mexico have increased for 2005, along with a growing sense that the country can weather the confusion and anxiety that the end of a sexenio normally stirs up. INDEX 28/02/'05 NOMINAL

Index Monthly Accrued STOCK MARKET IPC 13,789.46 5.3% 6.8% INMEX 803.44 6.0% 7.2% MUTUAL FUNDS Equity 3,674.41 3.9% 4.4% Debt for Individuals 4,326.22 0.4% 0.8% Debt for Corporations 1,714.10 0.5% 1.1% ECONOMIC ACTIVITY Industrial 5,050.36 1.4% 1.4% Retail 17,365.03 6.0% 6.9% Non-Financial Services 12,204.10 6.4% 6.8% Insurance and Banks 7,973.87 0.0% 17.3% Broker Firms 466.98 0.0% 0.0% Financial Groups 584.94 3.4% 7.7% SECTOR Mining 18,350.25 10.5% 10.0% Industrials 4,386.26 4.3% 5.5% Construction 23,280.03 3.8% 9.0% Retail 21,172.13 5.8% 5.7% Communications & Transportation 59,628.25 5.7% 5.9% Services 2,018.63 3.6% 8.7% Holding Companies 4,434.64 1.4% 0.8% INDEX REAL (1) DOLLARS (2)

Monthly Accrued Monthly Accrued STOCK MARKET IPC 5.0% 6.4% 7.2% 8.3% INMEX 5.7% 6.8% 7.9% 8.8% MUTUAL FUNDS Equity 3.6% 4.0% 5.8% 6.0% Debt for Individuals 0.1% 0.5% 2.2% 2.3% Debt for Corporations 0.2% 0.8% 2.3% 2.6% ECONOMIC ACTIVITY Industrial 1.1% 1.1% 3.3% 2.9% Retail 5.7% 6.5% 7.9% 8.5% Non-Financial Services 6.1% 6.4% 8.3% 8.4% Insurance and Banks -0.3% 16.9% 1.8% 19.0% Broker Firms -0.3% -0.3% 1.8% 1.5% Financial Groups 3.1% 7.3% 5.3% 9.3% SECTOR Mining 10.2% 9.6% 12.5% 11.6% Industrials 4.0% 5.1% 6.2% 7.0% Construction 3.5% 8.6% 5.7% 10.7% Retail 5.5% 5.3% 7.7% 7.2% Communications & Transportation 5.4% 5.5% 7.6% 7.4% Services 3.3% 8.3% 5.5% 10.3% Holding Companies 1.1% 0.5% 3.2% 2.3%

Ramon Ruiz (rruiz@vintagepartners.com) is a managing partner of Vintage Partners.