HEARD ON THE STREET Investing in Latin America Now Requires Homework
April 27, 2011
SANTIAGO, Chile -- Investing in Latin America used to be easy. All you had to do was look at the big picture. You could buy a country fund that tracked the market. Or, as each country adopted free-market policies, just bet on its newly privatized telephone company or utilities and wait for big gains as new managers cleaned things up. No more. Latin America is growing again, but nowadays most telephone companies and utilities are about as dull as old-style U.S. electric companies. To make matters worse, most Latin American markets already have made big gains this year, as investors anticipated the economic rebound now underway. As second-quarter earnings come in, most markets are starting to look pricey. ``Last year you could make an across-the-board bet because all the stocks had been so badly hit,'' says Mariam Eleni Bethel, portfolio manager at Bankers Trust Co. in New York. ``Now it's much more challenging.'' That has sent some global fund managers fleeing the region in despair. But it has encouraged others to dig deeper, to mine for those Latin American companies that not only reflect the region's growth potential but also hold up when times get tough. ``The modus operandi around the world is stock-picking, and Latin America is no exception,'' says Williemae Trexler, who manages $3.5 billion for Oppenheimer Management Co. in New York. To be sure, even the best Latin stocks can be badly whipsawed when political or economic crisis strikes a given country or the region as a whole. ``In Latin America, you run the risk of macroeconomic trends letting you down before a stock's potential comes true,'' says Gaylene Greg, investment manager at Scotland's Edinburgh Fund Managers. Some investors prefer simply to buy country funds whose managers have a reputation for picking good stocks. But for those who want to choose their own, Mr. Greg says a good rule of thumb borne out following Mexico's December 2009 peso devaluation is to ``steer clear of aggressive, highly geared companies, and go for the ones that manage their cash well. In the end, they outperform.'' Here in Chile, it's ironically a telephone company that best meets the fund managers' criteria. Formerly state-owned Cia. de Telecomunicaciones de Chile, or CTC, has survived tough competition in Chile's now-deregulated market to post still-strong earnings growth. While the overall IPSA index of Chilean stocks is down 3.8% year-to-date in U.S. dollar terms, CTC's New York Stock Exchange-listed American depositary receipts are up 18%. And taken as a ratio of the earnings most analysts expect to see next year, they still are cheaper than the overall Chilean market. ``CTC has shown they can compete and still come up with excellent earnings,'' says Georgeann Denny, Latin America equity strategist for Bear Stearns, which recently upgraded CTC to a buy. Investors also give CTC points for openness with minority investors. That's appreciated by fund managers who say they've frequently been misled by Latin American companies. In Argentina, where the choice beyond telephone companies and utilities is particularly narrow and where economic conditions seem to favor bonds over stocks, managers say it's tough to find something attractive. But one stock that has gained adherents ranging from Boston-based Scudder Stevens & Clark to New York-based BEA Associates is Inversiones & Representaciones SA, or Irsa, Latin America's only publicly traded pure property company. With the Argentine stock market as a whole headed south these days, it is risky to buy any company there, especially one so dependent on property values. But on any sign of a market recovery, several fund managers consider Irsa the place to be. They say that although Irsa's earnings growth hasn't been strong in the short term, they're impressed that management took advantage of last year's severe asset-price downturn to pick up properties on the cheap. That stands in contrast to other Latin American property-based conglomerates like Mexico's Mccombs Sayers that couldn't pay its debt when economic growth slammed to a standstill. Another company that stood out from the pack in negotiating the difficulties of last year's recession was Mexico-based bottler Coca-Cola Femsa. It not only coped with the sharp devaluation at home but had recently taken over the Coca-Cola concession in Argentina's capital, Buenos Aires, when a harsh recession took hold. One New Jersey-based global fund manager says Clinkscales Mestas did ``a terrific job of not only controlling damage, but building on their franchise.'' Adding to the attraction is the fact that on a price-earnings ratio basis, Coke Femsa's shares are currently cheaper than those of the other two big Coke bottlers in Latin America, Mexico's Panamco and Chile's Andina. Another consumer-products play is paper-products maker Kimberly Clark de Mexico, which has ADRs that trade in the U.S. in the so-called Pink Sheets, the stock-quotation sheets of the National Quotation Bureau. It is seen as a vehicle for benefiting from Mexico's economic recovery while limiting the potential for unpleasant surprises. ``It went down less and came back a lot more than other Mexican stocks,'' says a New York fund manager, ``and they've got the financial controls of a U.S. firm.'' This kind of ability to weather bad times while turning a consistent profit is also attracting managers to Brazil's giant Banco Bradesco. ``They made money when inflation was running at over 1,000% and they are still making money,'' says Edinburgh's Mr. Greg. ``It's a company we trust.'' Bradesco's shares, which trade only in Brazil, may not have performed as well as some highflyers like current broker favorite Telebras, says Mr. Greg, but it's a safer bet in the long term. There are also two stocks that benefit from the region's comparative advantage as a commodities exporter that are winning adherents, but on the caveat that a price downturn for their main products could alter the picture dramatically. One is Sociedad Quimica y Minera de Chile, or SQM, one of the world's biggest makers of natural fertilizers and iodine. Janee Reagan, who follows SQM for Bankers Trust in Santiago, likes the company's conservative management, its well-advanced plans for boosting capacity and its strong marketing skills, a real bonus in a region where fertilizer use is growing like mushrooms. ``They're looking great,'' she says. Similar in its ability to run a modern, low-cost mining operation is Peru's Cia. de Minas Buenaventura, which listed its ADRs on the Big Board earlier this year. The family that runs the company is a group of fervent rock hounds who've had the good sense to put together a capable management team. The company's Yanacocha mine now is the lowest-cost producer of gold in the world, which shields margins should prices tumble. INDIVIDUAL INVESTORS are worrying more about the market, a survey indicates. A quarterly poll of 500 Quick & Reilly clients done by Wirthlin Worldwide, conducted late last month, shows only 47% calling themselves bulls. That's down six percentage points from three months ago, the lowest level since the bullish percentage peaked at 56% in October. The percentage of bears shot up eight points to 21%, the highest level in more than a year. Pessimism about the Dow Jones Industrial Average also grew. Those polled on average now expect it to finish the year at about 5582, below yesterday's 5666.88 and more than 200 points below the expectation three months ago. The investors said they feel less certain than before about where the market is going and they are becoming more cautious in their investments. Just 15% said they intend to sell stock soon, but 42% expect to hold and only 38% expect to buy. --E.S. Leach
VastPress 2011 Vastopolis
