WITH approval of the North American Free Trade Agreement (NAFTA), Wall Street is showing new signs of skittishness about domestic concerns, especially rising interest rates and reports of a stronger-than-expected United States economic expansion.
But that does not mean Wall Street has forgotten NAFTA, nor the Mexican stock market. In the weeks before the vote in the House of Representatives, US market indexes were on the upswing. This reflected in part investor expectations that the three-way trade pact between the US, Canada, and Mexico would benefit a number of US companies and thus domestic stock markets. And US investors have helped fuel the Mexican stock market this year.
``Investors had largely discounted NAFTA [as a stock market issue] by early last week, as they realized the measure would clear Congress,'' says Larry Wachtel, a vice president with Prudential Securities Inc. ``With the NAFTA vote out of the way, the market is once again looking at underlying fundamentals, including rising interest rates. What we're now seeing is a deteriorating [domestic] stock market.''
On Friday, the Dow Jones industrial average closed up 8.67 points, at 3,694.01 points. Perhaps more importantly, Mr. Wachtel says, the broader market - as measured by such indexes as the Standard & Poor's 500 and the NASDAQ composite index - is showing renewed signs of strain, with far more stocks registering market declines than advances.
The NAFTA vote is widely considered a plus for the US equities market, despite the possibility of some lost jobs in the US over the next few years, as companies in such industries as textiles shift part of their operations to Mexico.
According to a new report by the investment firm Bear Stearns & Company, NAFTA is also expected to lead to a ``significant flood'' of new capital into Mexico, both in direct investment as well as into stock funds investing in Mexican equities. The new capital, the report says, should help hold down Mexican interest rates, thus boosting values of firms on the Mexican exchange.
While there have been few definitive studies of what the new capital flows might mean for Mexico, one estimate - produced by American economist Robert McCleery at Kobe University in Japan - suggests that NAFTA might lead to a shift of capital from the US to Mexico of around $2.5 billion annually.
The Mexican Bolsa market index is currently in the 2,160 range, up 23 percent in dollar terms for 1993. The Bolsa index hit its 1993 low at the end of February, when it sank into the 1,400 range, down from 1,800 in January. Some analysts say the Bolsa could climb 50 percent or more during the next 12 months, spurred by low interest rates and faster economic growth. Foreign investors, including from the US, own shares of Mexican companies valued at around $40 billion; that amount is roughly one-fourth the market value of all stocks traded in Mexico.
Stocks on the Mexican market currently have a modest price-to-earnings ratio of around 12, compared to around 23 on the Standard & Poor's 500 index.
New capital outflows of $2 billion or more annually into Mexico should not work against the US stock market, or business formation in the US, Wachtel says, considering that the total gross domestic product in the US is around $6 trillion. Other analysts agree. ``$2 billion is not all that much, when you remember that President Clinton probably made deals worth $1 billion just to get NAFTA enacted by the House,'' laughs Robert Brusca, chief economist with Nikko Securities Inc. in New York.
Overall US capital outflows have already been substantial in 1993, in part because of high interest rates abroad. In the first half of this year, pension fund managers invested about $18 billion in overseas issues; that is roughly equal to the total dollar value of pension-fund investments in calender year 1992.