Citi Reduces Chile Equity, Raises Mexico

Citi has upgraded Mexico to neutral and cut Chile to underweight in its equity portfolio, warning that LatAm overall looks expensive. The move in the latter is based on a weaker fundamental outlook and the prospect of another 50bp rate hike. In Mexico, it adds ICA and Simec to the focus list and in Chile the shop drops Entel. Latin America equity markets are now trading at a trailing P/E discount to developed markets of only 5%-10%, down from 60% in 2002, says Citi. It sees overall valuation convergence in global equity markets as cost of capital differentials have narrowed, but warns that EM including Latin America is 10-20% expensive to bonds. “With the emerging market discount almost gone and developed markets (alone) still cheap to debt, emerging markets seem set for a period of underperformance,” says the shop in a report. Brazil is Citi’s sole overweight in the region. It dropped Sadia from that country following an analyst’s downgrade.