By Martha M. Hamilton and Stan Hinden
Washington Post Staff Writers
Saturday, December 24, 1994; Page D01

The Mexican peso began to stabilize yesterday, but investors were still reeling from huge losses resulting from the surprise devaluation of Mexico's currency earlier in the week.

In the seven days ending Thursday, mutual funds that invest in Latin American stocks lost approximately $600 million -- nearly 16 percent of their value, according to figures supplied by Lipper Analytical Services Inc. And mutual funds accounted for only a portion of the losses resulting from the peso's plunge.

Mexican stocks suffered losses in heavy trading during the week, and investors who held bonds denominated in pesos also saw the value of their holdings slump.

"Blood in the streets" was the phrase that fund managers used repeatedly during the week to describe the ugly investment scene that followed the devaluation and the angry reaction to it.

Mexico's stock market index was up slightly yesterday, as were stock market indexes in Argentina, Brazil and Chile.

On Wall Street, Mexican stocks recovered some ground in American depository receipt trading. Telefonos de Mexico rose 1/4 to 40 7/8, and Grupo Televisa climbed 1/2 to 32 7/8. Other Latin American stocks, which had fallen with the Mexican shares on Thursday, also bounced back. Telefonica de Argentina gained 1 3/8 to 51 1/8, and Telefonos de Chile rose 1 1/2 to 79 1/2.

By yesterday, the peso appeared to be settling at about 4.75 to the dollar -- a level about one-third lower than the value at which it traded before the devaluation. The Mexican government, which previously had assured investors that it wouldn't devalue the peso, decided to drop its value by 15 percent on Tuesday and completely pulled the props out from under it Thursday.

Although no one expects the peso to recover anytime soon to its artificially high levels before the devaluation, fund managers said yesterday that it would take months or even years to assess the real level of damage.

"We've had two days of evidence, and I don't think that's a foundation for long-term policy," said Dwight D. Churchill, head of taxable fixed-income funds for Fidelity Investments. Five of Fidelity's funds had exposure in Mexico, which ranged from 9.4 percent for its Fidelity Advisor Emerging Markets Income fund to 30 percent for Fidelity Latin America.

However, Churchill noted that most of the exposure was in securities that were denominated in dollars, which wouldn't necessarily suffer the same damage as securities denominated in pesos.

Mexico's actions during the week raised serious concerns about the credibility of the government of newly sworn-in President Ernesto Zedillo. The forces that pushed the government to devalue the peso included a large trade deficit, rapidly dwindling foreign currency reserves -- which means that the government was running out of funds to prop up the peso -- and new signs of unrest by peasant rebels in the southern state of Chiapas.

The strategy behind the devaluation was to reduce the cost of Mexico's exports in hopes of improving the country's balance of trade and bolstering reserves. However, analysts said during the week that Mexico had bungled the way in which it handled the devaluation and had badly shaken investor confidence. Foreign investment is a key to continuing economic growth in the largely impoverished country.

In the first few days after the devaluation, the decline in Mexico's stock market was followed by weakness in other South American stock markets, but analysts said yesterday that other stock markets probably would not suffer lasting damage from the Mexican debacle.

"I think investors by and large realize that the situation in Brazil is very different from that in Mexico," said Thomas W. Keesee, a partner in Banco Pactual, a Brazilian bank and investment firm. Keesee noted that Brazil has a positive balance of trade and much larger foreign currency reserves that Mexico had even before they began declining.

James M. Bogin, portfolio manager for GT Global Markets in San Francisco, said the recent problems in Mexico wouldn't put investors off emerging market funds, an extremely hot investment the past year, for very long.

"These are still the fastest growing countries in the world," he said. "We could have a rough couple of months, or six months, or a year, but are emerging markets going to disappear? Not unless 30 countries disappear, and I don't think that is likely."

However, he noted that rising interest rates in more developed countries could also continue to attract money away from those markets in the short run.

A spokeswoman for T. Rowe Price Associates Inc., where Mexico accounted for about 36 percent of Latin American fund holdings, said that investors had not been bailing out and that some others had decided to take advantage of the situation to transfer money into funds that were invested in Mexico.

"Clearly U.S. investors have been sort of shocked and angry at what's gone on in Mexico, but I think the ultimate question is what this will do to the Mexican economy, and whether it will come back," said James R. Libera of Washington International Advisors, a D.C. firm that manages global portfolios for individuals and institutions.