Mexico Joins Small-Cap Stock Bid

The equity market environment could favor LatAm small caps in the near-term, according to analysts, some of which tip less liquid Mexico stocks as a buy. “When you have growth, you generally have small caps doing well,” notes a portfolio manager at one of Brazil’s largest asset managers, with over BRL500m invested in small caps across 3 funds. The executive’s shop has a 6% 2010 Brazil GDP growth target. He notes, however, that recent losses for Ibovespa were driven by generalized global sell-off. The latter hit disproportionally large, liquid and well-owned names that make up the majority of the index. Brazil, BlackRock portfolio manager Will Landers estimates that if the Bovespa returns 30% this year, Brazil small caps could jump by 45%-50%. Less liquid names elsewhere in the region could also surprise on the upside. JPMorgan believes small caps in Mexico are likely to outperform thanks to depressed valuations versus larger cap names and growth premia that are not reflected in current prices. The shop’s top picks in the country include Urbi and ICA. Citi’s LatAm equity strategy head Geoffrey Dennis, however, sees the coming year as complicated for smaller equity issuers. “I would tend to think the cycle in 2010 is not very conducive for small cap outperformance,” he says. Dennis notes that 2009 offered more attractive conditions for outperformance and adds that generalized uncertainty will lead to a more volatile environment that requires more stockpicking and trading, and less buy and hold. The MSCI LatAm small cap index has risen 170% in the 12 months through February 19, most of which is a correction after a similarly-sized plunge in 2008-2009. The Ibovespa was up 70% in 12 months to last Friday.