Standard & Poor’s August downgrade of the U.S.’s sovereign-debt rating jolted Latin American markets that had already seen their fair share of turbulence over the past year. “Latin American equities experienced a strong rally throughout the second half of 2010, sending the region’s equity markets up 27 percent in dollar terms,” says Pedro Martins Jr., deputy head of Latin American equity research at BofA Merrill Lynch Global Research in São Paulo.
But that rally was not sustainable, as investors found more and more issues to keep them awake at night: concerns that government efforts to control inflation would inhibit real gross domestic product growth, worries that an economic slowdown in China would decrease demand for the region’s exports, fears that sovereign-debt crises in Europe would spread and more.
“Europe is a big driver of the global economy, and when people become worried about global economies, they tend to worry about the commodities markets and Latin America in general,” says Ben Laidler, J.P. Morgan’s New York–based head of Latin American research and strategy. “The massive inflows you saw come into the emerging markets last year moderately reversed this year, so you saw more outflows from Latin America, which created more uncertainty.”
Then came the S&P rerating. In the days that followed, the Mexican peso and the Brazilian real — the region’s two most frequently traded currencies — weakened against the dollar as investors sought liquidity, fearful that the U.S. would fall back into recession and curtail growth in markets far beyond its borders. By mid-August, Latin American markets were down 19.8 percent in local currency terms for the year.
With so much uncertainty in the air, “there were few themes you could latch on to and run for any period of time,” says Laidler. “That’s created a difficult environment in which to advise clients on how to make money.”
Difficult — but not impossible. Institutional Investor asked portfolio managers to tell us which researchers have provided the most helpful advice as they seek to make — or avoid losing — money in Latin America, and the analyst teams they named most often can be found at J.P. Morgan. The firm, which finishes in first place on the Latin America Research Team for a third year running, captures 17 total team positions, three more than last year and two more than the two banks that tie for second place: BofA Merrill Lynch Global Research, which slips one notch, and Morgan Stanley, which climbs one rung. The survey’s biggest gainer is Santander, which leaps from seventh place to fourth after picking up five positions, for a total of 13. Itaú BBA rounds out the top five, with 12 positions. Results are based on responses from more than 660 analysts and money managers at some 350 firms that manage an estimated $457 billion in Latin American equities — roughly 52 percent of the MSCI emerging-markets Latin America index market capitalization of $874 billion at the time of the polling — and $154 billion in Latin American debt.
Profiles of the teams that finish in first place in each of the survey’s 22 sectors appear on the pages that follow; those of teams that land in second and third place, along with a wealth of other data can be found in the full Latin America Research Team ranking.
“The combined impact of renewed concerns on economic growth in the U.S. and the sovereign outlook in Europe has certainly affected Latin American equity markets,” observes Laidler, who captains the top-ranked team in Equity Strategy for a second straight year and also leads the No. 3 team covering Mexico. “Ultimately, however, Latin American economies are in a strong relative position, with few of the fiscal, debt and growth concerns constraining developed economies. We have made only moderate cuts to our Latin America GDP growth forecasts.”
J.P. Morgan has made modest additions to its Latin American research operations, picking up three analysts over the past year, for a total of 34, and expanding coverage by ten stocks, to 175. Laidler says he expects to boost coverage by ten companies by year-end.
BofA has been expanding much more aggressively in the region. It hired nine analysts, for a research staff head count of 41; broadened coverage by 13 companies, to 167; and increased corporate debt coverage from 15 to 50 companies, according to Martins. These new hires, which include five economists, reflect changing client demands.
“Investors in the past were asking for very stock-specific, action-driven research,” says Martins, who leads the No. 3 team in Equity Strategy. “Now investors want to see more big-picture, in-depth reports across industries.”
BofA’s expansion is not over: “We are considering new initiatives, new sectors and new geographies,” Martins adds.
Dario Lizzano, who oversees Latin American research and sales at Morgan Stanley in New York, tells a similar story. He upped his analyst head count by five, to 35, and plans to bring aboard five more in the coming year to cover agribusiness, banking and financial services, oil and gas, retailing and transportation. “Those are the sectors that are consuming the majority of new resources,” he notes.
Santander increased its analyst total by only two, to 32, but they cover 27 more companies, for a universe of 207 stocks. The firm is at the end of its expansion phase, at least for the time being, according to Jesus Gomez, who became Santander’s head of Latin American equity research in June after Cristián Moreno left to join Santiago, Chile–based Celfin Capital as chief executive officer of asset management.
“Institutional investors have increased exposure to the region, so we have put more research resources there over the last three years,” says Gomez, who works out of New York.
He believes global worries will continue to distract investors. “In Latin America there is growth, a good structural story, political stability and strong companies with good balance sheets — the source of uncertainty is in Europe,” Gomez says. “In the short run, Latin America will continue to be affected by other countries and sources of noise; but in the long run, it has one of best investment stories out there.”
Other research directors agree. “The situation today is of strength — there are no issues with balance sheets, deficits are small relative to developed markets, and financing is abundant for corporate and government bond markets,” Lizzano says. “Inflation will decelerate in Latin America, and that will trigger global funds coming back to the region.”
When they do, they will find the analysts on the 2011 Latin America Research Team ready, willing and able to assist them.
