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Someone will probably notice that 8% Dividend soon.....
Arnold Layne
Yahoo! News Saturday July 4 1:15 AM ET
Hunting for Bargains in Latin America
July 3, 1998 -- Investors have punished Latin American stocks this year, but many market analysts say the downturn is strictly a case of guilt by association with Asia.
Every time Asian stocks have tumbled in 1998, a result of the crisis in many Asian economies, there has been a domino effect on Latin American markets. Analysts attribute the connection to investors' putting all the emerging markets into one basket -- at least in their investment
decisions.
On June 15, for example, when the Morgan Stanley Emerging Markets Free
Asia index fell 3.4 percent, the Emerging Markets Free Latin American
index was off 3.5 percent. The Latin American index is now down about 22 percent for the year.
Many analysts, though, say the link is a fallacious one -- and that the market ultimately will reward those who see Latin America's virtues.
"The dip in the market presents opportunities,'' said A. Michael Lipper, president of Lipper Analytical Services in Summit, N.J. "This is exactly the time to get in.''
Eduardo Cabrera, chief Latin America strategist at Merrill Lynch & Co., agreed that "there's long-term opportunity in Latin America.''
"The Asian crisis has created very attractive values for the region,''
he said. Ernest W. Brown, chief economist for Latin America at Morgan Stanley Dean Witter, said potential economic growth would improve to 4.3 percent a year from 1997 through 2006, up from 2.7 percent a year from 1987 to 1996. So far, he said, the region was muddling through, although it "is being growth-constrained by events abroad.''
"The constraint is investors sitting on their hands waiting for the
crisis in Southeast Asia and Japan to pass,'' Brown added. "Thus far,
they are staying away from Latin America in droves.''
For investors who want to go back in, analysts say the safest way to
play Latin America is through the scores of funds dedicated to the
region. Managers are expressing confidence, but they have their work cut out for them. The average Latin America fund fell 19 percent in the second quarter, according to Lipper Analytical, after rising 0.8 percent in the first quarter.
What's more, the average open-end Latin America fund lost 50 percent of its assets in the last 12 months from redemptions, Cabrera said, with a steady 1 percent trickling out of funds in 23 out of 25 weeks.
Patti Satterthwaite, manager of Fidelity Latin America, one of the
region's best-performing funds, acknowledged that the fund had had
redemptions in the last quarter but said the volume was not alarming.
Like other managers, she is looking for a turnaround. "Southeast Asia
has had a significant impact on price levels and volume, down 25 to 35
percent in Latin America,'' said Ms. Satterthwaite, who has managed the fund since March 1993. "As liquidity continues to dry up, price
volatility gets higher and higher. We've seen this before, in 1995.''
In the meantime, she is looking for bargains in blue-chip companies,
particularly telecommunications stocks. In general, she said, Latin
American phone companies are among the cheapest in the world. Among the fund's holdings are Telefonos de Mexico and Telecom Argentina.
"The privatization story in Brazil looks attractive with Telebras,'' she said. Telebras, the Brazilian phone giant, is preparing to break up into 12 companies this month.
Finally, Ms. Satterthwaite sees opportunity in the consumer sector. In
Mexico, for example, real wages are rising, giving some consumers who
have been struggling for the last two years the spending money they
need, she said.
T. Rowe Price Latin America continues to hold a large position in
Brazil, said its manager, Benedict R.F. Thomas. Telebras accounts for
18.3 percent of the fund's net assets, he said, "by far, our No. 1 pick in the region.''
While Telebras is down nearly 5 percent for the year to date it has
outperformed Morgan Stanley's Brazil index by 13.1 percent, he said.
Thomas views the pending breakup as relatively good news for investors.
"With hugely improved management and growing sector demand, we think,
over all, the progress is positive indeed,'' he said.
T. Rowe Price Latin America has doubled its position in the last year in YPF, an Argentinian oil and gas company, so that it now makes up 5.5 percent of the portfolio, Thomas said. Argentina is planning pipeline projects to Brazil, Uruguay and Chile, which will allow YPF to sell its gas reserves.
So far, YPF is down 13 percent for the year, hit by a big drop in oil
prices, Thomas said, but it has still outperformed the local index by
5.1 percent.
In Mexico, Thomas said the fund lowered its position in Grupo Modello
SA, the No. 1 beer marketer, to 2.3 percent of the fund in the last
year, because it is trading at 18.6 times 1998 earnings. And it started buying Modello's competitor, Femsa Cervesa SA de CV, which now accounts for 2.7 percent of the fund, trading at just 8.2 times 1998 earnings.
"It's another example of growth at a reasonable price that is not
cyclical,'' he said.
Donald W. Hoskins, who manages the Excelsior Latin America fund for U.S. Trust, looks for companies that do not need a lot of capital, that can grow internally and that have solid valuations. "There are especially attractive valuations in Latin America right now,'' he said.
He shares the other managers' enthusiasm for Telebras, which makes up
10.5 percent of the fund, and he started buying shares two months ago in Companhia de Electricidade do Estado do Rio de Janeiro, or Cerj, a
utility that went private in 1996.
The stock now makes up about 2 percent of the fund. With new management, Cerj is operating more efficiently, Hoskins said. The stock is trading at 0.57 Brazilian real, and he expects it to rise to 0.95 in the next 12
months.
Hoskins also likes the media sector, especially two Mexican television
companies. He began buying TV Azteca SA, the country's second-largest
broadcaster, when it started trading American depository receipts in
August 1997 at $18.75; it now makes up 1.6 percent of the fund.
The company trades at around $13, but he expects it to rise to $22 in 12
months. At the beginning of the year he began buying Grupo Televisa, the largest network in Mexico, which now makes up 2.7 percent of the fund. The company trades at 167.7 Mexican pesos, and he expects it to rise to 218 pesos in 12 months.
What makes these companies attractive to Hoskins is the growth in
television advertising in the region. As a percentage of gross domestic product, total advertising spending is 1.8 percent in Brazil and 0.4 percent in Mexico, compared with 2.5 percent in the United States, Hoskins said.
"We think that the advertising sector is very attractive, driven by more competition and consumers spending very strongly,'' he said.
He also likes Minsur SA-Trabajo, a tin mining company in Peru, which he began buying in February and which now makes up 2.5 percent of the fund. Hoskins said Minsur was increasing productivity by expanding its mines by 50 percent. It is also adding 40 percent more refining capacity, he said.
The company reached a high of 6.24 Peruvian soles on June 11, hitting a low of 3.92 on Jan. 19. It now trades at 5.8 soles and he expects it to rise to 8.8. "The real story is their ability to increase production,'' he said. "It has nothing to do with what's happening in Asia.''
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