Latin America rewarding the brave
Markets in the region have staged an impressive recovery and many of the economies are looking better than they have in a long time, CAROLYN LEITCH writes
globeandmail.com By CAROLYN LEITCH Saturday, May 10, 2003 - Page C1
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It took courage to put money into Latin America in recent years. In 2003, the brave are reaping their rewards.
Many investors fled the region last year after Argentina had embarked on the world's biggest debt default and many feared that South America's largest economy -- Brazil -- would soon topple into its own morass.
But this year, Brazil's recently inaugurated President Luiz Ignacio Lula da Silva, known as Lula, has won praise for his policies and calmed fears among his critics that the former trade unionist would drive down the value of Brazil's currency, stocks and bonds.
By all accounts, Latin America's financial markets have staged an impressive recovery and many of the region's economies are looking better than they have in a long time.
At the same time, the currencies have been gaining strength against the sliding U.S. dollar.
While many investors have veered toward Mexico and its relatively stable economy buttressed by the United States, Mexico's Bolsa index has risen 7.3 per cent in local currency and 9 per cent in U.S. dollar terms this year. Compare that with the stunning rise in Brazil's Bovespa stock index, which has soared 15 per cent this year in local currency and 38.1 per cent in U.S. dollar terms. There has been money to be made, too, in Argentina, where the Merval index has jumped 21.9 per cent in local currency and an eye-popping 49.2 per cent in U.S. dollar terms.
So sharp has been the runup in Brazil that Nandu Narayanan, chief investment officer at New York-based Trident Investment Management LLC and manager of the CI Emerging Markets fund, has begun taking profits in his holdings there.
Mr. Narayanan notes that Brazil's president still faces challenges, because the country's very high debt and real interest rates are difficult to grapple with. But he believes Lula has the support to push through painful changes because he is perceived as one of the workers.
"Lula, if anything, has proven a very pragmatic and sensible president who, in a way, is the best thing Brazil could have asked for."
But Mr. Narayanan points out that developing economies are geared to global growth. As a result, Brazil and other Latin American countries face harm from the spread of SARS in China.
While the economies of the United States, Europe and Japan stagnate, many economists have been looking to China to drive the world's growth. The country is a net importer of raw materials, and if SARS slows China's expansion, many economies will be hurt, the strategist says.
Meanwhile, Brazil's enormous debt load means that it needs to be on the receiving end of foreign capital all the time.
"A lot of the export story that drove Latin America is starting to be in question."
Mr. Narayanan has shifted his focus to Mexico, which he believes could prosper with a rebound in the U.S. economy.
"The policy mix in the U.S. is most conducive to driving growth."
Mexico has also benefited from oil exports, and the country's policy makers have the flexibility to weaken the peso further against the U.S. dollar and thereby fuel growth.
"They have a lot more policy flexibility than Brazil."
The long-term story in Mexico has been the improvement in living conditions, and Mr. Narayanan expects that to continue.
As a result, he likes companies such as Wal-Mart Mexico SA de CV, Coca-Cola Femsa SA de CV and Telefonos de Mexico SA.
"It's still pretty attractive, given the prospects in the rest of the world."
The strategist is steering clear of Argentina, because the country's markets offer huge risks and little clarity. Mr. Narayanan likens Argentina to a broken Humpty-Dumpty and says it's not clear how politicians will be able to put it together again.
"To tell you the truth, we couldn't call Argentina right now."
Political turmoil in Venezuela -- including a two-month oil industry strike orchestrated by opponents of President Hugo Chavez as part of a national protest designed to drive the populist leader from office -- has also kept Mr. Narayanan out of investments in that country for some time.
"You've got almost a rich-versus-poor battle going on in Venezuela," he says. "It's a very difficult situation and it's not one that I can see an easy resolution to."
So deep is Venezuela's malaise that economists estimate the economy will contract 12 to 15 per cent this year.
Scott Piper of Morgan Stanley Asset Management Inc. has a different view of the big picture in Latin America. The co-manager of the TD Latin American Growth fund has been shifting assets out of Mexico and into Brazil, Argentina and Chile in recent months.
In the previous two years, Mexican corporations offered better management teams and more predictable earnings, he said. Countries in South America, meanwhile, were overly indebted with poor underlying growth prospects and shaky reform initiatives.
Mr. Piper sees three trends that he believes are bullish for South America:
The declining U.S. dollar is making currencies of countries in the region more competitive;
Current account deficits as a percentage of gross domestic product are shrinking as a result;
Economic reform initiatives are improving conditions.
Mr. Piper notes that investors have woken up quickly to Brazil's brighter prospects and he is expecting the market to pull back after its recent rally. But he is continuing to increase his holdings in the country.
In Brazil, Mr. Piper favours commodities. While the strengthening Brazilian currency hurts exporters, the manager notes that the country is rich in natural resources and the lowest-cost producer in the world for commodities such as iron ore.
Mr. Piper is wary of Brazil's regulated sectors, such as electricity and energy, which could see more government interference in future.
The country's banks are well-managed and offer a good hedge against inflation, he says, but Mr. Piper says bank stocks look fully valued to him.
Mr. Piper has been trimming some holdings in Mexico at the same time because the outlook for U.S. economic growth is so uncertain.
"Mexico is essentially at the whim and will of the U.S. economic cycle."
Morgan Stanley has trimmed its growth forecast for Mexico's gross domestic product to 2.1 per cent this year from its previous forecast of 3.5 per cent.
But the manager has not been more aggressive in selling down Mexico, he says, because on a bottom-up basis, he still finds plenty of well-managed companies with good prospects. He notes that a growing number of people in Mexico are gaining access to credit. As a result, he likes the country's bank stocks and Wal-Mart Mexico SA de CV.
Looking at Argentina, Mr. Piper notes that the dramatic currency flight of last year has normalized. And while the country faces a landmark runoff election this month, he believes that regardless of the outcome, Argentina's newly elected leader will have to negotiate a new agreement with the International Monetary Fund and current bondholders.
"Both candidates have to address those problems and they know it."
Morgan Stanley is forecasting GDP growth for Chile this year of 3.5 per cent. Mr. Piper says this relatively robust growth should fuel consumer demand, while credit growth will be good for the country's banks. Mr. Piper has added to positions in sectors such as telecommunications and beverages.
While Mr. Piper has increased his weighting there in Chile, he still finds it difficult to find good value because stocks tend to be very expensive compared with others in the region.
Annette Hester, an economist and director of the Latin American Research Centre at the University of Calgary, sees bullish signs in the region but she warns that the economies are still vulnerable.
Brazil, for example, recently managed to float a $1-billion (U.S.) bond issue that was six-times oversubscribed.
"It looks good, but it's Latin American and it's a world that's very susceptible to shocks," she says of Brazil and its trading partners.
The Argentine economy seems to be doing better but the fundamentals are not there, she says. Venezuela, meanwhile, is split between those for and against President Chavez.
"It's very uncertain, very volatile and very polarized," Ms. Hester says of the political and economic landscape.
Ms. Hester add that the economies of Chile and Mexico are faring relatively well, but whether the economies of the United States and other trading partners will rebound remains to be seen.
"I'm leery of making big forecasts, knowing how unique and volatile the situation is in each individual country."
MEXICO GDP 2002: 0.9% 2003 forecast: 2.9%
Outlook: Mexico's economy moves in tandem with the United States. The outlook for growth is uncertain.
BRAZIL
GDP 2002: 1.5% 2003 forecast: 1.2% Outlook: The new president has inspired confidence and a rally in the stock market, but slower growth in China could dampen prospects for the resource-rich economy.
CHILE
GDP 2002: 1.9% 2003 forecast: 3% Outlook: Chile has fared well despite negative effects spilling over from Argentina and adverse terms of trade, but the expected firming of copper prices should underpin growth.
VENEZUELA
GDP 2002 est.: -8.9% 2003 forecast: -15% Outlook: Venezuela will be facing lower oil prices, which will make necessary reforms even more difficult in the middle of an acute political crisis.
ARGENTINA
GDP 2002: -11.1% 2003 forecast: 2% Outlook: The country faces enormous obstacles in its financial system and while the situation has stabilized somewhat in 2002, the authorities will face a difficult situation in containing inflation in 2003.