Must-read. Fear, Not Fundamentals Guides Investors In LatAm Stocks
Dow Jones Newswires -- August 28, 1998
By MARGARITA PALATNIK
Dow Jones Newswires
NEW YORK -- With turmoil rattling financial markets worldwide, investors in Latin American
stocks are replacing technical analysis of equities with pure emotion.
"At this point, get your fundamentals and your technicals and throw them out the window," said
one trader. "We're trading on sentiment."
And the sentiment these days is decidedly negative.
Latin stocks have been especially hard-hit in 1998. So far this year, Brazil has declined 35.1%,
Mexico is off 41.6% and Argentina is down 47.5%.
The selloff in Latin stocks has been prompted, in large part, by global factors including Asia's
currency woes, Russia's deepening economic crisis, and weak commodity prices. In the face of
such international events conspiring against Latin equity prices, investors aren't sure what
constitutes a "cheap" stock anymore.
Until now, investment professionals had looked to measures like price to earnings ratios or
enterprise value to earnings before interest, taxes, depreciation and amortization, or EV/EBITDA,
to determine a stock's value. (Enterprise value is the total value of a company's equity and debt).
But now some market observers say that the usual ways to value Latin American stocks may no
longer be applicable.
"With the turmoil all over the world, you put aside your traditional ways of analyzing and look at
emerging markets in a different way," said Gabriel Perel, chief executive of Israel-based
Evergreen Canada Israel Investments Ltd.
Adds Yohay Golden, Evergreen's chief analyst: "From our experience, traditional ratios reflect the
past, which, in an emerging market is many times misleading, if not completely irrelevant, because
markets change very rapidly."
Also worrying investors in Latin America is fear of the unknown.
"The emerging sentiment is that maybe we're looking at something we've never seen before.
Maybe this is it," said Randy Stark, a PaineWebber broker based in Florida.
Perhaps that's why, some experts say, technical tools are temporarily out of fashion.
"They don't matter much at the moment," said Deutsche Bank emerging market strategist
Geoffrey Dennis. When the time comes, (valuation ratios) will kick in, but the issue is that now
liquidity pressure is great, as is currency risk, so nobody cares about valuation."
A trader agreed.
"With the risk of hyperinflation, cheapness doesn't matter," he said. "Who cares about
price/earnings, price/book value, EV/EBITDA or price/free cash-flow? If the currency is going to
go to nothing, all those ratios are worth nothing." [Yeah, right, Brazil's currency going to zero with $65-70B in reserves. Ridiculous...]
Even analysts who are extremely bullish on countries like Mexico, Argentina and Brazil, and who
have issued "buy" recommendations for many companies in those countries, now say: "Great
company, very cheap, but not today."
By standards commonly applied until just weeks ago, however, many of these firms look cheap.
For example, Telecomunicacoes Brasileiras SA (TBR), the region's bellwether known as
Telebras, is trading at 6.6 times P/E. Its American depositary receipts closed Thursday at $71
3/4, down from its 52-week high of $147 11/16.
But both a low P/E ratio and the myriad "buy" recommendations out for recently-privatized
Telebras are falling on deaf ears. The ADR continues to hit 52-week lows almost on a daily
basis.
Among Brazilian financial companies, meanwhile, Banco Bradesco SA (E.BBR) is trading at 1.3
times book value, while Unibanco-Uniao de Bancos Brasileiros SA (UBB) is trading at book
value.
- - ITEM NOT STORED - BAD HEADER
This year's free-fall in Latin American stocks followed economic collapses in South Korea,
Indonesia, and China. Most recently, Latin America has been plagued by troubles in Japan, Hong
Kong and Russia. Low commodity prices have also done their damage.
But Latin American stocks have mostly been guilty by association, market observers agree.
"Not only are they struggling under the 'emerging markets' label, but also under the weakness of
natural resources," said Michael Burpee, manager of The International Portfolio LLC. "They're all
being pounded because the world has simply said 'those countries are natural resource
producers, therefore we'll sell.'"
In other cases, Latin American stocks, relatively liquid compared to other emerging market
equities, are being sold to meet margin calls, mutual fund redemptions, or to cover losses incurred
in other parts of the world.
Of the four largest Latin economies, only Venezuela has been discounted by market participants,
most of whom still believe in the soundness of Argentina, Mexico and Brazil.
But what virtually paralyzes investors considering Latin securities is that every day seems to bring
a new crisis and a new record low in prices. And with an increased level of interdependence
between global markets, both real and psychological, there seems to be no end to the bad news.
"Everything is so cheap now," said Pedro Thompson-Flores, New York based representative of
Brazilian brokerage FonteCindam. but Thompson-Flores noted that, in hindsight, the same stocks
looked cheap a week ago, "and then look what happened." Thompson-Flores added that he is
telling clients to neither buy nor sell. [Uh, that's pretty gosh darn sophisticated...]
-By Margarita Palatnik; 201-938-2226; margarita.palatnik@cor.dowjones.com
Briefing Book for: TBR | E.TCB
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