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Latin America’s Amazing Resilience
Barely touched by the credit crunch, Latin American markets win the nod from investors — as do these analysts, who cover the region.
Buoyed by surging worldwide demand for commodities, Latin American equity markets have been steaming ahead, -slowed -only -briefly by the U.S.-sparked subprime mortgage crisis and worldwide liquidity crunch. The MSCI emerging--markets Latin America index gained 28.0 percent in -local currency terms (45.2 percent in dollar terms) for the 12 months -ended mid-May, outpacing the 20.0 percent (23.1 percent) advance of the MSCI emerging--markets index and trouncing the 7.8 percent (3.1 percent) loss of the MSCI world -index.
The extent to which the -local economies and capital markets have been isolated from external events and have held up relatively well points to a turnaround in -many of the key -Latin America economies in terms of fiscal positions, including significant foreign exchange re-serves, explains Adam Quinton, New Yorkbased director of Latin American equity research at -Merrill Lynch.
Damian Fraser, UBS Pactuals Mexico -Citybased director of Latin American research, agrees: Economies are in good shape, companies are generating lots of profit, banks are sound, and the governments are pursuing sensible macroeconomic -policies.
The resilience that Latin American -equity markets have demonstrated during the global economic meltdown has intensified investor interest in the region and heightened the demand for -equity analysis, prompting -many investment banks to expand their research departments and increase the number of companies they -cover. -Credit -Suisse added four Latin American -equity analysts last year, for a total of 24, and increased its coverage universe by more than 30 percent, to 153 companies, according to -Roberto Attuch, the firms São Paulobased co--director of Latin American -equity research.
Impressed with the expansion, buy--siders name the Swiss banking behemoth the leader of the 2008 Latin America Research Team, Institutional Investors 16th annual ranking of the top -equity research providers in the region. The results reflect the opinions of 375 buy-side analysts and investment professionals at 230 institutions, which collectively manage an estimated $323 billion in Latin American -equities.
Credit Suisse, which rises from second place, captures 18 total team positions, four more than last year, including six first-place finishes, double its number in 2007. UBS Pactual slips from first to second, with 17 team positions; the firm held its research department head count to 32 but added coverage of 40 more stocks last year, for a total of 185 companies, Fraser says. Rising one notch each, to third and fourth place, respectively, are Merrill Lynch (12 positions) and Santander Investment Securities (nine). Merrill added four Latin America analysts last year and plans to add two more, according to Quinton. Santander went on a hiring spree in 2007: Its research department grew by nearly 50 percent, to 44 analysts, according to Cristián Moreno, New Yorkbased head of Latin America equity -research.
JPMorgan jumps from seventh place to fifth, after increasing its Latin America research staff by six publishing analysts, to 27. We were very New Yorkfocused, but we took the decision that we needed to beef up the -local presence, so we have been putting people -into Mexico, Brazil and -Chile to get -closer to companies and build more of a regional presence, says Santiago--based Ben Laidler, a former -equity strategist at UBS Pactual who moved to -JPMorgan in October to head up Latin American -equity research and s-trategy.
Bolstering local coverage is increasingly important as Latin American countries establish individual market identities in the eyes of investors. In recognition of the rising dominance of -local markets, we are shining a spotlight on the four top--ranked team leaders who direct equity coverage on a countrywide basis; all four lead No. 1 teams for the first time this year.
Brazil, of course, towers -over -other Latin American -equity markets; the benchmark Bolsa de Valores de São -Paulo, or -Bovespa, index skyrocketed 41.5 percent in the 12 months -ended May 15. Attuch, 39, who guides -Credit -Suisses Brazil squad up one notch to No. 1, says the countrys good times are not -likely to end soon. We believe that -credit supply expansion and a shift in consumer habits will play an important role for -local equities -over the next few years, explains Attuch, a Universidade de Brasília economics graduate who joined Banco de Investimentos Garantia in 1993 and assumed coverage of all Latin American banks five years later, after CSFB acquired -Garantia.
The teams top picks for the past year included oil com-pany Petróleo Brasileiro, recommended in June at 27.20 reais ($14.19), on improving financials heading -into the third quarter. We have held the stock as our top pick, -firmly confident in Petrobrass case of multi-year upstream expansion, exploratory success, upgraded refining profitability and gas integration, says Attuch. By mid-May the stock had sizzled up 107.4 percent, to R56.40.
The teams strategy reports and agricultural, mining and oil analyses are, in my view, value--adding and -timely, declares one portfolio -manager.
Although its stock market has not performed as well as Brazils, Mexico has been moving away from its dependence on the U.S. economy and is enjoying vibrant growth. Tomás Lajous, who captains UBS Pactuals Mexico team from -runner-up all the way to the top, notes the resilience of the countrys benchmark Índice de Precios y Cotizaciones in the face of the subprime crisis: The IPC gained 6.5 percent in the 12 months -ended May 15; during the same period the Standard & Poors 500 index lost 5.2 percent.
The key risk remains -global -credit uncer-tainty, but we see Mexico as defensive because government debt levels are low; Mexican corporates have -very healthy, cash-rich balance sheets; and the consumer has -very little debt, says the Mexico Citybased Lajous, 29, who joined UBS in 2003 after earning a masters degree in mathematics from New York -University.
Among the teams top picks of the past year is América Móvil, Mexicos biggest mobile phone operator. Lajous recommended its American depositary receipts in January 2007, at $44.25, based on expected robust growth of the company through 2010, -driven by penetration gains and enhanced traffic patterns and -data revenues. By mid-May the price had shot up 31.5 percent, to $58.19, and Lajous remains -bullish.
An even more impressive pick: the ADRs of Mexicos biggest television broadcaster, -Grupo Tele-visa, which the team recommended in February, at $21.94. The shares were trading just 5.5 percent above their near-18-month lows, Lajous explains. At these levels, valuation is at an estimated 7.3 times 12-month forward ebitda, a discount to the Mexican markets 7.5 times. By May 15 the ADRs had soared 24.5 -percent.
Investors are ecstatic. I believe that Lajouss team is very well informed their research takes -into account a -broader view of issues than most analysts do, says one -money man-ager. They are -also efficient in communicating it to -clients.
Alonso Aramburu, 36, who leads Santanders North Andean Countries team up one notch to first place, rightly called the strong -rally in -Peru, and by visiting local com-panies with him, I could witness the good access and detailed knowledge he has with those companies, says one enthusiastic investor. One of the companies Aramburu told clients to buy was Credi-corp, Perus biggest financial ser-vices outfit, which he -deemed the most attractive stock to play the -macro growth of the Peru-vian economy, owing to its high liquidity and strong earnings growth and the improving profitability of its insurance and pension fund assets. From Aram-burus -July buy recommendation through May 15, the share price had -risen 25.8 percent, even as inflation fears and tight credit drove the Lima Stock Exchange down 25.0 percent.
Another winning pick: Cia. de Minas Buena-ventura, Perus biggest publicly traded precious--metals mining com-pany. The Santander team recommended its ADRs in October, at $52.84, -based in part on an anticipated rise in production at all of the com-panys operating units. By mid-May the price had shot up 19.8 percent, to $63.30.
Aramburu, who has analysts in Bogotá, Caracas and -Lima, directs coverage from New York, which he sees as a distinct advantage. It gives you a better perspective for the overall Latin American region and the context of the Andean region within this environment, he says.
Clients agree. Alonso is one of the few regional analysts providing consistent coverage on those countries, says one port-folio man-ager. He drills down from his -macro call into well--articulated, specific investment -cases.
Aramburu, who earned an MBA from the University of Pennsylvanias Wharton School of Business in 1994, was an associate at -Violy, Byorum & Partners, a New Yorkbased mergers and acquisitions boutique focused on Latin American companies, before joining Santander in 2003.
A colleague of Aramburus, Francisco Errandonea, took the reins of Santanders Chile team last fall from Raimundo Valdés, who moved to New York to become executive director of the firms Latin America equity sales. He steers the squad to a fifth straight year on top. Errandonea, 30, joined Santander in 2003 after earning a bachelors degree in civil industrial engineering from Universidad de Chile. Although the Chilean economy is evolving more -slowly than those of -other -Latin American countries, owing to high inflation and limited -credit, Errandonea and his Santiago--based team have identified money-making opportunities for investors. Last August the team recommended Empresas Copec, Chiles biggest conglomerate in terms of market capitalization, with subsidiaries in fishing, forestry and petroleum, believing the com-pany would benefit from the positive outlook for softwood pulp prices. Considering the scarcity of pine pulp and the fact that Copec is the Latin American pulp producer with the highest exposure to that kind of pulp, we viewed it as the best way for exposing to that market, says Errandonea. In January, after the stock had gained 3.7 percent, compared with a 22.4 percent decline in the benchmark IPSA index, Errandonea told investors to take -profits.
The Santander team is a reliable source, and their -local knowledge is -very valuable, says one client. Analysts -based in domestic markets -cover companies better than analysts based in New York or elsewhere. Given the rush to place analysts on the ground in Latin Americas teeming economies, investment banks appear to have come to the same -conclusion.