3 Firms Top 2015 Latin America Research Team Roster

With economic growth slowing and commodities prices falling, it’s getting harder to find viable investment ideas in the region — but these analysts can help.


The challenges facing China and Greece have dominated headlines in recent months and overshadowed a number of similar crises afflicting Latin American economies. Many countries in the region are grappling with slowing growth, depreciating currencies, rising unemployment and heightened political tensions.

In July the International Monetary Fund slashed its outlook for Latin America’s real gross domestic product growth, from 0.9 percent to 0.5 percent this year and from 2 percent to 1.7 percent in 2016.

Even with this downgrade, some market observers believe the IMF is being too optimistic.

“Latin American economies have decelerated substantially and are now facing the challenge of recovering in a global context that includes Chinese deceleration, commodities price corrections and the prospects of higher interest rates in the U.S.,” observes Carlos Constantini, director of research at Itaú BBA in São Paulo. “In this context, we forecast Latin American GDP to grow 0.3 percent in 2015 and 1.6 percent in 2016.”

Bank of America Merrill Lynch expects regional economic expansion of just 0.2 percent this year, reports Brett Hodess, New York–based head of Americas equity research; while J.P. Morgan anticipates a 0.1 percent contraction, thanks largely to troubles in the region’s largest market, Brazil.

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“The uncertainty surrounding policy and its impact on the economy — and the ongoing investigation of bribery allegations — should continue to weigh on both consumer and business confidence,” explains Pedro Martins Jr., who oversees Latin American equity research at J.P. Morgan in São Paulo. “Political momentum has diminished, and the government’s approval ratings have fallen. As a result, the government is likely to face further difficulties in implementing its agenda, jeopardizing the quality and the duration of the fiscal policy adjustment.”

Add in falling commodities prices and a decline in agricultural production owing to a below-average rainy season, and the result is “less predictability and more volatility in the economy, jeopardizing the timing of a recovery,” he says. “The recession likely will be deeper, and the recovery likely will take longer.”

Against such a tumultuous backdrop, money managers are eager to be kept informed of the latest developments and obtain insights into how they can position their portfolios more effectively. But they are divided as to which firm does the best job of providing guidance. This year three firms share the top spot on Institutional Investor’s Latin America Research Team: BofA Merrill, which vaults from fourth place; Itaú, which rises one rung; and returning champ J.P. Morgan. Each earns a place in 23 of the survey’s 25 sectors.

However, when a weighting of four is assigned to each first-place position, three to each second-place position, and so on, J.P. Morgan is the clear winner, with a weighted score of 56 to BofA Merrill’s 52. BTG Pactual — which comes in fourth overall, with 19 appearances — finishes third in the weighted results, with a score of 48, just ahead of Itaú’s 46. Credit Suisse is No. 5 on both rosters. It claims 14 positions and a score of 33.

Click on the Leaders link in the navigation table at right to view the full list of 13 firms represented on this year’s team, or Weighting the Results to see how these institutions compare when the aforementioned formula is applied.

The table also provides links to profiles of the crews in first, second and third places in each sector (plus a list of runners-up, where applicable), as well as information regarding when each team first appeared in its sector, total number of appearances amassed to date, total appearances at No. 1 (where applicable) and comments from money managers about what distinguishes each squad from its peers.

Survey results reflect the opinions of 915 investment professionals at more than 460 institutions that collectively manage an estimated $388 billion in Latin American equities and roughly $303 billion in Latin American debt.

The regional growth forecasts, while dismal, don’t tell the whole story. “Within Latin America we see three clearly divergent outlooks for GDP,” says BofA Merrill’s Hodess. “One, Mexico — which is less impacted by China and commodities prices — should grow above the average.” Chile, Colombia and Peru should also do well, on a relative basis, owing to more effective government policies, he adds, while “Argentina, Venezuela and Brazil should pull the average down, as we expect all three to be in recession.”

Given the current macroeconomic situation, it’s hardly surprising that Latin America is home to some of the world’s worst-performing stock markets: Colombia, down 26.5 percent in the first seven months of the year, in dollar terms; Brazil, down 21.4 percent; Peru, down 14.1 percent; Chile, down 9.8 percent; and Mexico, down 5 percent. (During the same period the S&P 500 advanced 2.2 percent.) Ordinarily such losses would create fertile ground for bargain hunters, but that may not be the case this time.

“We are not seeing a buying opportunity yet in the equities markets, and we still think valuations could go through some correction,” contends Itaú’s Constantini. “What we have seen so far is the performance of Latin American markets reflecting fundamentals of each country, including rising cost of capital — and risks — and falling earnings expectations.”

The situation in Brazil illustrates his point. “Despite being one of the worst performers in dollar terms, we think this has merely reflected earnings downgrades and part of the increase in cost of capital,” says Constantini, leader of the group that rises from second place to first for coverage of that country. “As a matter of fact, current valuations across Latin America are still above historic averages for most countries, which may be in line with other global emerging markets — and even with developed markets — but may not be sustainable in a risk-off environment.”

Guilherme Paiva — who guides the Morgan Stanley squad to a fourth straight victory in Equity Strategy (and also leads teams that earn runner-up positions for coverage of Argentina, with Cesar Medina, and Brazil) — shares a similar view.

“We remain cautious about the outlook for regional equities despite the 50 percent-plus loss recorded from the peak a little bit over four years ago,” the New York–based strategist says. “The key reasons continue to be limited progress in addressing the structural challenges in several economies, like Brazil, Colombia and Peru, or relatively demanding valuations in markets like Mexico.”

Those aren’t the only reasons. “Latin America still is a heavy commodities-producing region,” he points out. “We will probably need another couple of years before the supply-demand equation for base metals becomes more balanced, providing a tailwind to prices.”

The way to play this market, Paiva says, is to divide the region into two groups. The first includes such countries as Chile and Mexico, which have gone a considerable distance toward resolving structural challenges, and the second includes those that still have a long way to go. In the first group the team recommends sectors leveraged to growth, such as consumer discretionary and financials; and in the second they urge clients to consider defensive sectors or those leveraged to a strong dollar, such as consumer staples, select industrials and pulp.

Analysts at BTG Pactual are also urging caution, at least in the near term, according to Rodrigo Góes, São Paulo–based head of equity research, sales and trading. However, “for those investors with a longer-term horizon, the current sell-off may present a good entry point. All countries impacted by reduced commodities prices are going through adjustments that will eventually create the conditions for renewed growth.”

He sees more trouble ahead for Brazil. Despite the recent market rout, the region’s largest economy “may still go through a period of increased volatility, mainly because of the country’s messy political situation and weakening economic prospects,” Góes says. “However, there are some high-quality operations now trading at more compelling valuations that may prove good investment opportunities.”

The team at BofA Merrill sees “more reasons to remain bearish than bullish in the short term on Latin America equities,” advises Hodess. “The growing political instability in Brazil and to a lesser extent in Chile has exacerbated the impact of lower commodities prices, weaker China growth and poor policy decisions.”

Nonetheless, “equities could continue to outperform in Mexico, given earnings expansion on recovery of the consumer sector and a relatively better macro environment that should benefit from the U.S. recovery,” he says. “In Chile we like valuations and see limited downside risks to the currency, despite mixed economic activity. After local pension funds reduced exposure to local equities, the valuation premium looks more balanced.”

In late July, J.P. Morgan upgraded the latter market from underweight all the way to overweight, Martins reports, making the case that “political noise in Chile will moderate in a context of attractive valuations and more realistic earnings-per-share estimates” of 11 percent this year and 13 percent in 2016.

At the same time the analysts downgraded Peru from overweight to underweight, on the belief that low commodities prices could weaken growth and the nuevo sol against the dollar. “Roughly 60 percent of exports and more than 10 percent of fiscal revenue in Peru are related to metal commodities, and currency weakening will affect companies’ earnings given their exposure to nonhedged dollar-denominated debt,” explains Martins, who helms the squad that claims second place in Equity Strategy for a second straight year.

BTG Pactual has dubbed Chile its top pick among the Andean countries. “Chile’s economy has relatively stronger fundamentals than its peers, while valuations are at historical low levels,” Góes maintains. “Colombia remains our least-preferred country in the region, as earnings visibility is very low at this point.”

Itaú is directing investor attention elsewhere. “From today’s levels, and considering a 12-month horizon, we still favor Mexico among Latin American markets, to the detriment of Brazil,” Constantini says. “These are the most important overweight and underweight positions in our model portfolio.”