Azernews.Az

By Bloomberg

Industrial companies led by Alfa SAB are defying losses in Mexico's corporate bond market as increased government spending at home and economic growth in the U.S. propel production and bolster earnings.

The companies' dollar-denominated debt has returned an average 3 percent this quarter, compared with the broader market's 0.1 percent loss, data compiled by Bloomberg show. The $500 million of 2044 notes issued by Alfa, which makes food and chemicals, rose 6 percent for the biggest gain among the nation's 223 corporate dollar bonds. The 2024 bonds from ICA SA, the largest construction company, gained 3.3 percent.

After government spending delays damped production last year, economic growth in the both the U.S. and Mexico, which sends about 80 percent of its exports to its northern neighbor, is helping bolster demand. Industrial output in Mexico rose 0.3 percent in July from June, the sixth increase in the past seven months, the national statistics agency reported last week.

"I like especially the industrial sector that's benefiting from both sides," Ray Zucaro, a money manager at SW Asset Management LLC, said by telephone from Miami. "Industrial production is a beneficiary of the recovering demand out of the U.S. and overall the good things that are going on in Mexico."

Zucaro said he owns bonds of San Pedro Garza Garcia-based Alfa, which sells products as varied as plastic bottles and car- engine parts. He also bought Tlalnepantla-based Mexichem SAB's bonds due in 2044 in a $750 million sale on Sept. 9.

Pena Nieto

The gains in Mexico's industrial bonds also outpaced the 2.5 percent return industrywide across emerging markets, data compiled by Bloomberg show.

Industrial companies will also profit from the country's plan to open its oil industry to private drillers, according to JPMorgan Chase & Co. President Enrique Pena Nieto has said the energy law could spur $250 billion in foreign investment and help lift annual growth close to 5 percent by 2018.

That may lead to a "boost in infrastructure projects," Gabriel Lozano, an economist at JPMorgan, said in an e-mail.

Alfa has also positioned itself to benefit from the changes. The company increased its stake in Bogota-based Pacific Rubiales Energy Corp. to "build a more robust exploration and production business in order to take advantage of potential opportunities in Mexico," Chief Financial Officer Ramon Alberto Leal said in July.

Growth Outlook

Mexico's economy, Latin America's second-largest, will grow 3.8 percent next year, from an estimated 2.6 percent this year, according to economists surveyed by Bloomberg.

The U.S. economy is forecast to accelerate 3 percent next year, which would be the fastest in a decade, from 2.1 percent this year.

Mexico's peso was little changed at 13.2565 per U.S. dollar at 7:03 a.m. in New York.

Industrial companies are also poised to benefit from a revival in Mexican government spending, Zucaro said. Pena Nieto plans to spend 7.75 trillion pesos ($585 billion) through 2018 on infrastructure projects such as high-speed trains and gas pipelines. This month, he announced plans to build a $9.1 billion airport in the nation's capital.

Last year, government-spending delays and a collapse of the nation's homebuilding industry slowed economic growth to 1.1 percent, less than a third of the pace in 2012.

ICA will bid to build the new airport with Grupo Carso SAB and seven other closely held Mexican companies, according to the construction-industry chamber.

Pemex Contract

If the group wins the contract, Mexico City-based ICA would be responsible for 18 percent of the construction, said Angel Macias, executive vice president of the chamber.

ICA will also benefit from a $737 million contract awarded by Petroleos Mexicanos to its join venture with Irving, Texas- based Fluor Corp. It was among five awarded on Sept. 11 by Pemex for refinery upgrades, worth a combined $2.8 billion.

Winning the contract shows ICA is "very well positioned to take advantage of the multibillion investments that will derive from the energy bill and infrastructure spending in the coming years," Rafael Elias, a Latin America fixed-income strategist at Credit Agricole SA, said in note to clients.