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2010 Latin America Research Team: Region's Markets Give Mixed Messages

Global uncertainty is overshadowing the region’s strong growth — and dragging down stocks.

Latin American equity markets, which sizzled in the second half of last year, have largely fizzled this year. MSCI’s emerging-­markets Latin America index gained 27.1 percent from July through December 2009, only to fall 1.1 percent year-to-date through July. A decline in worldwide demand for the region’s all-­important commodities and fears of a double-­dip recession in the developed markets of Europe and the U.S. have been a drag on Latin American markets, as investors continue to worry about what the future will bring.

“Global uncertainties have taken center stage, especially concerns about the impact of a Chinese slowdown on commodity demand, sovereign stresses in Europe and recent signs of slower growth in the U.S.,” observes Ben Laidler, New York–based head of Latin American equity research at J.P. Morgan. (See “The New World Trumps the Old”.)

Pedro Martins Jr., deputy director of Latin American equity research at BofA Merrill Lynch Global Research in São Paulo, agrees. “It was a front-­loaded rally in the second half of last year and then negative returns in the first half of this year,” he says. “Investors anticipated the risk of a global economic slowdown ahead and reduced their equity exposure in Latin America.”

Domestic moves are also making investors nervous. Earlier this year many local governments began tightening the loose monetary policies they enacted in response to the global meltdown. For instance, Brazil’s central bank left its key overnight lending rate unchanged at the historic low of 8.75 percent from July 2009 through April; since then the rate has been increased three times, to 10.75 percent, and economists expect an additional rate hike this month.

All of these factors have led to investors’ “feeling like they are on shaky ground,” Martins says, and being eager for research that can help them find their footing. Two firms outpace all others when it comes to providing the kind of insight that money managers consider most useful: BofA Merrill Lynch Global Research and J.P. Morgan, which share top honors in the 2010 Latin America Research Team, Institutional Investor’s 18th annual ranking of the region’s best analyst teams. BofA jumps from third place to No. 1, while J.P. Morgan repeats in first place. The firms capture 14 total team positions each: BofA, one more than last year; J.P. Morgan, one fewer.

Two outfits tie for third place, with 12 positions each: Credit Suisse, which slips one notch after losing two positions, and Morgan Stanley — the year’s biggest gainer — which leaps from No. 6 after picking up four positions. Rounding out the top five is Itaú Securities, which rises from seventh place and adds five positions, for a total of 11. Results are based on responses from more than 500 portfolio managers and buy-side analysts at some 320 institutions that collectively manage an estimated $419 billion in Latin American equities.

The recent market volatility has fueled demand for a different kind of research. “Years ago investors wanted big primers to get better educated on the region, but now they need more specific research on companies and actionable thematic investment reports,” says Martins, who leads the No. 2 team in Equity Strategy. (Analysts ranked No. 1 in their respective sectors and the complete list of winning analysts, including those ranked second, third and runner-up, click here.)

To meet that demand, many firms have been adding analysts and expanding their coverage of Latin American markets over the past year. BofA increased the number of analysts on its Latin America team from 25 to 30 — including five economists and two credit strategists — and expanded its coverage from 149 to 154 companies, Martins says.

J.P. Morgan added three analysts, for a total of 26, and broadened coverage from 160 to 165 stocks; by the end of the year, those analysts will be tracking 175 stocks, says Laidler, who leads the top-­ranked team in Equity Strategy. “We remain committed to a broad regional footprint,” he says, noting that the firm has analysts based in Argentina, Brazil, Chile and Mexico, as well as in New York.

Morgan Stanley picked up five analysts, bringing its Latin America research department head count to 30; they follow 140 stocks, ten more than in 2009, and will cover 165 by the end of this year, according to Dario Lizzano, the firm’s New York–based director of Latin American equity research. The new hires include two researchers based in Mexico City; two more analysts will join that office by year-end.

“The Mexico market will continue to grow locally, and that is why the majority of the resources and hires were done at the country level,” Lizzano says. “Despite the problems in the developed markets, the Latin America equity business continues to be strong, and average daily trading volume in Latin America is at an all time-high,” he says.

Itaú lost two analysts, which it plans to replace, and shifted its focus, relocating some of its researchers from São Paulo to Mexico City. “We reduced our team in Brazil and increased our team outside Brazil,” explains Carlos Constantini, the firm’s São Paulo–based head of research. “We want to expand coverage to new regions. We already cover 14 companies in Mexico, one company in Argentina, and there’s more to come.” Itaú’s 34 analysts track 144 stocks, up from 125 last year.

The move by some firms to reach a broader segment of the Latin American market is in part because of a steep decline in equities in Brazil, the region’s largest economy. One of the world’s best-­performing emerging markets last year, Brazil is now one of the worst: The nation’s benchmark Bolsa de Valores, Mercadorias e Futuros Bovespa index slid 1.6 percent in the first seven months of 2010 (see “Let the Gains Begin — Again”). Mexico, by contrast, has fared somewhat better; its benchmark Índice de Precios y Cotizaciones of the Bolsa Mexicana de Valores inched up 1.1 percent year-to-date through July.

“In Brazil commodities are severely overrepresented in the stock market,” notes Constantini. “Therefore, it is fair to say that commodities dictate the biggest part of the Latin America market performance.”

Diversifying across the region will help lessen the impact of declining demand for Brazilian commodities, which has overshadowed the region’s dynamic growth. Morgan Stanley expects Latin American ­economies to deliver aggregate year-over-year real gross domestic product growth of 6 percent this year and 3.7 percent next year, with corporate earnings growth of 50 percent in 2010 and 23 percent in 2011. “These figures are significantly stronger than for any developed economy,” says ­Lizzano.

As a result, many analysts believe that portfolio managers will soon rekindle their love affair with Latin American markets, and they predict strong growth. “We think Brazil will outperform, followed by Mexico and Chile,” says BofA’s Martins. “In aggregate those equity markets will post strong earnings of 30 percent this year and 20 percent next year.”

When stakeholders decide to return to the region to share in those gains, they will find no better guides than the analysts on the 2010 Latin America Research Team.