Barron's. Gutsy Investors See Value in Latin America
interactive.wsj.com
September 10, 1998
By Vito J. Racanelli
If you think things are bad in the U.S., just take a look at the battered, beaten
and bloodied markets south of the Rio Grande.
As late as midyear, Latin American stock markets were
down a relatively modest 3% to 17%. That was no great
shakes, but it was much better than the carnage and
full-scale capitulation that already had swamped other
emerging markets in Asia and Russia.
But that was then. In the last few weeks, Latin American equities have plunged
on the same worries that hurt Asia: higher interest rates, currency devaluations,
worsening corporate performance and economic slowdowns across the
continent.
As of Wednesday's close, Brazil's Bovespa Index was down 45% and
Argentina's Merval Index had plunged 49%. Mexican shares have fallen 39%,
while Chile was off 40%. On Thursday, Latin American markets gave up even
more ground -- the Bovespa plunged another 16% -- in sympathy with sliding
U.S. markets. (Last year, Latin America funds returned an average 25%,
according to Lipper Analytical services.)
"The fundamentals are deteriorating....
It's crunch time," says Jane Heap, the
Latin American strategist for Deutsche
Bank Securities, which last week cut its
projections for economic growth in
1999 for seven Latin American
countries. Brazil, for example, should
now experience 1% growth next year
instead of 2.5%, she says, (That's about
the same as her predictions for this
year.) In recent days many Wall Street
brokerages have similarly chopped their
economic growth projections for Latin America.
And there may well be more downside risk in these markets. If Brazil devalues
its currency, the real, Argentina and other countries could follow -- and you
can toss even the reduced growth estimates out the window, warns Heap. As
Weekday Trader pointed out recently, fear and negative sentiment are likely to
overshadow the fundamentally sound changes -- free markets, low inflation
and improved democratic institutions -- that have spurred "tiger-like" growth in
Latin American countries in recent years (See "Latin Markets Don't Have
Much Bounce Left," June 18).
Nevertheless, with nearly all Latin American markets in full retreat, certain
defensive stocks may begin to look attractive even if the markets' bottom is
nowhere in sight. After all, people will still make phone calls and quaff soft
drinks in a severe bear market or economic recession, some are beginning to
say.
And while its growth will likely slow, Latin America doesn't have the serious
structural problems afflicting Japan, Russia and Southeast Asia. For example,
while Malaysia imposed strict currency controls, Brazil's government -- in an
election year, no less -- said it would continue to cut the budget deficit this
year and next.
It's unclear if that will be enough to stave
off devaluation, but the country is
moving in the right direction, notes Paul
Stocking, senior Latin American analyst
for American Express Asset
Management. And if South American
countries like Brazil can avoid
devaluations and ruinously high interest
rates, economies might grow more
slowly -- but they will continue to grow,
says Heap.
Now, make no mistake: Few if any strategists or analysts are pounding the
table for these stocks. Though Stocking isn't about to predict a bottom for
these markets, he is willing to say that "on a fundamental basis there is a strong
argument that they [Latin American stocks] are oversold." And Heap feels
more bullish about Latin American equities 18 months from now.
So does James Barrineau, the area strategist for Salomon Smith Barney, who
says these markets may need to fall even further before they find a bottom.
But, he adds, "if you have a longer time horizon, then there are cheap stocks."
Where? Barrineau prefers liquid stocks that have reliable earnings. All of the
region's telecommunications stocks have gotten crushed, and "if you have a
scenario where the dust settles, then Mexico is poised to perform the best," he
says. (Unlike most Latin American currencies, Mexico's peso is free floating.
So while this week Brazil has been hiking rates to defend the real and
Colombia effectively devalued its currency, Mexico is likely to have more
stable interest rates.)
For those reasons, among others, both
Barrineau and Heap like Telefonos de
Mexico SA, or Telmex, the country's
dominant carrier. At Thursday's close of
$33 1/4 -- a new 52-week low and
43% off their 52-week high of 58 7/16
-- the shares sell at about seven times
First Call's consensus estimates of
$4.59 per ADR in 1999. That's around
10% higher than the estimated $4.16
this year. Wall Street is looking for
annual earnings growth of 15% for
Telmex over the next five years.
Heap also likes Telefonica de Argentina SA, one of Argentina's two big
telecom carriers, which covers the southern half of the country, including the
capital of Buenos Aires. At Thursday's close of $19 3/4 -- also a new
52-week low and 50% off their 52-week highs -- Telefonica's ADRs change
hands at less than seven times First Call's consensus estimates of $2.88 per
ADR in 1999. That's 12.5% ahead of this year's estimated $2.56; analysts
project annual profit growth of 13% over the next five years.
Even those who think the worst may be over suggest treading carefully.
American Express's Stocking advises investors to avoid financial stocks, which
he says are essentially leveraged country plays, because of their exposure to
rising interest rates. Of course, commodity stocks and basic industries --
which represent a big chunk of Latin American markets -- are also likely to
underperform, other analysts say.
Clearly, Latin America will remain a volatile and risky place to invest for some
time. The bottom might not come soon, but when it does, stable market
leaders like Telmex and Telefonica will likely be at or near the top of investors'
shopping lists.
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