Fairly positive TBR reference in tonight's BusinessWeek
businessweek.com@@k9amM2QAGPgOKwAA/premium/37/b3595035.htm
LATIN AMERICA: MORE WHERE THAT CAME FROM
The region faces further pain, but
intrepid investors can find defensive
plays
How low can they go? That's the guessing game investors in Latin America are
playing right now. Turbulence in Asia and Russia has knocked major Latin stock
markets down by as much as 72% in dollar terms this year, with much of the
collapse coming after the Russian ruble devaluation on Aug. 17. Brazil, under
pressure as the government struggles to prevent a devaluation of the real, lost
40% in August. Mexico and Argentina are down by half since Jan. 1, and Chile,
long the region's economic model, is at its lowest level since 1993. Amid the
dizzying flight from emerging markets, shares of well-managed companies with
solid balance sheets are plunging along with weaker ones burdened with debt.
''Rational analysis of stocks has been abandoned,'' says Susan Gilbertson, head
of Latin American equity sales for Banque Paribas in New York. ''Everyone is
afraid of their shadow.''
Most analysts recommend sitting on the sidelines until Russia and Asia show signs
of stabilizing, however tempting Latin stock prices may look. In Brazil, ''investors
are valuing stocks as if a [currency] devaluation had already taken place,'' says
Walter Stoeppelwerth, director of Latin American research at Robert Fleming
Securities in Sao Paulo. Take one of Brazil's largest banks, Banespa, which is
controlled by the state government but scheduled for privatization next year. It
sells at a meager 3.5 times estimated 1998 earnings. But investors in Brazil and
the rest of Latin America have to accept that events half a world away could
further punish the region's markets. ''If you're looking ahead a year or 18 months,
prices will be significantly higher,'' predicts Jorge Mariscal, Latin America equity
strategist at Goldman, Sachs & Co. in New York. ''But there could be more
downside movement first.''
Even Latin America's safe havens offer little sanctuary. Government debt, for
instance, had been steadier than equities. But that changed with Russia's
devaluation. With investors running scared, Mexico had to cancel its weekly
treasury-bill auction on Aug. 31. And widely traded Brazilian Brady bonds lost
about 30% of their face value in August, cutting investors' appetite for the region's
long-term debt. Yields are at their highest since Mexico's 1994 devaluation. So
governments will have to pay more to finance deficits, while companies will find it
hard to raise cash by selling bonds.
A spike in bond prices may be needed before stock markets can recover. So
investors need a defensive strategy, analysts say. ''It's crucial to stick to good
names,'' says Damian Fraser, head of Mexico research at Warburg Dillon Read
in Mexico City. That means hunting down companies that could survive
devaluation, rising inflation, and a weaker global economy. Companies with little
debt or dependence on exports should head the list [Sounds like TBR...], analysts say, while those
linked to commodity exports--such as copper mines in Chile and grain exporters
in Argentina--should be avoided.
If there are any defensive plays left at all, they're telecom companies, such as
Telefonos de Mexico or Telebras in Brazil. They have been badly beaten down,
to be sure. But for investors determined to maintain a stake in the region, they
may offer some protection against even steeper market declines. For one thing,
telecom stocks are widely held, so they can be dumped quickly if necessary. And
they are less affected than most companies by economic swings or the threat of
devaluation because they supply essential services, mostly to domestic buyers.
Telmex now trades at about nine times estimated 1998 earnings, generates plenty
of cash, and has weathered the opening of Mexico's long-distance market.
American depositary receipts of Telebras, privatized in July, are down 52% from
their 52-week high, at $71 a share.
But the profits expected to be garnered someday from pent-up phone demand
can't protect Brazil right now. One big reason: Global investors remain troubled
by Brazil's budget deficit of 7% of gross domestic product, $260 billion in
government domestic debt, and an overvalued currency. A gargantuan $11 billion
fled Brazil in August, cutting the central bank's hard-currency reserves to $64
billion as it struggled to defend the real. In response to the currency pressure, the
government has made it easier for foreigners to invest in Brazil. But few are taking
the bait. Economists figure that if currency reserves drop below $50 billion, the
government will be forced to adopt austerity measures, including raising interest
rates sharply. Last October, it fended off speculators by doubling rates, to 43%,
but the economy came to a halt and GDP is expected to grow barely 1% this
year as it is. President Fernando Henrique Cardoso, favored to win reelection on
Oct. 4, will likely try to avoid moves that might alienate voters until after the
election. But if global market conditions worsen, he may have no choice.
Even if Brazil makes the right moves to please global investors, the reward may
be a long time coming. That has been Mexico's recent experience. Its government
still is in the throes of sorting out a banking crisis that will cost taxpayers $60
billion. But otherwise, it has shown admirable fiscal discipline, cutting the budget
three times to make up for declining oil revenues, while GDP is expected to grow
4.5% this year. ''Mexico has done everything to ensure a stable currency,
reasonable growth, and lower inflation, and it's getting whacked just the same,''
says Paribas' Gilbertson.
The same goes for Argentina. Its economy is among the soundest in Latin
America, with 4.5% growth expected this year. But its close trade partnership
with Brazil is a major drag when the going there gets tough. Besides, Argentina's
peso is managed by a currency board that has pegged it 1-to-1 to the U.S.
dollar. Although most observers expect the peg to hold, a rise in the greenback
crimps exports. Investors worry, too, about the impact of lower commodity
prices on oil company YPF and food producers such as Molinos Rio de la Plata.
As a result, the Buenos Aires stock market index is at its lowest level since April,
1995, when the country was in the midst of a deep recession.
HAZE-COLORED GLASSES? Latin America's weakest link is Venezuela,
where stocks are down 72% in dollar terms this year. Low oil prices have
reduced government revenues, sending short-term interest rates above 100%.
Now, the weakening bolivar is a candidate for devaluation before yearend, says
Goldman's Mariscal. Although Venezuela's economy is only the fifth-largest in the
region, a currency crash could weaken investor confidence in neighboring Brazil
and push Latin markets even lower.
The worst may not yet be over. The region could be in for more pain, particularly
if commodity prices continue to sink. Some analysts argue that investors
exaggerate the importance of commodities to the region, except in Venezuela and
Chile, which remain dependent on oil and copper. ''Oil is important to Mexico,
but the Mexican economy has become much more diversified in recent years,''
says Gilbertson. ''Market perceptions are clouding reality.'' But the haze isn't
going to lift as long as global markets are near the frontiers of panic. To invest in
Latin America, says Alberto J. Verme, managing director for Latin America at
Salomon Smith Barney in New York, ''you need patience.'' And a high tolerance
for risk.
By Ian Katz in Sao Paulo, with Elisabeth Malkin in Mexico City
Updated Sept. 3, 1998 by bwwebmaster
Copyright 1998, by The McGraw-Hill Companies Inc. All rights reserved.
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