EM’s high correlation to US markets is an omen of a worsening farther down the line. Moving into late November, however, crisis headlines had subsided, bailout announcements waned and choppy conditions took over.


Market watchers have been sniffing for a bottom despite the fact that regional stocks appeared mired in quicksand. LatAm indices were down 35% on average year to date through November 17, according to Economatica, with the biggest drops at the Bovespa (-44%), Peru’s IGBVL (-58%), Mexico’s Bolsa (-34%) and Argentina’s Merval (-54%).

“The source of this crisis not Latin America so you have to wait it out,” says Juan Bosch, Buenos Aires-based portfolio manager for Compass Group’s LatAm portfolios which has $100 million invested in equities in the region. “There’s not much you can do but try and stay more defensive.” Bosch adds that despite the difficult environment, he sees good opportunity within the region, as many of its economies have strong fundamentals that should boost the private sector.

Strategists say they see an eventual move out of slump. “We are positioned for a transition from a crisis trade to a recession trade,” says Ben Laidler, LatAm equity strategist at JPMorgan. “Our view is of cautious optimism,” he adds, noting the shop’s unofficial 12-month projection for the region’s indices is some 15%-20% higher than mid-November.

Other strategists agree. “A violent downward movement like the one we’ve seen tends to be followed by wide trading range,” says Michael Hartnett, head of EM equity research at Merrill Lynch. The MSCI Latin America’s 42% bounce in less than a week is indicative of what this range may be, says Citi in a mid-November report. The MSCI LatAm hit 1,675 on October 27 and then rose to 2,374 on November 4.

“Once you’ve established the floor and perhaps even a ceiling, you tend to find a group of stocks that does much better than the rest,” adds Hartnett. “For LatAm, the trick will be finding these best of breed companies,” adds the strategist.
Earnings will be a key determinant, he observes, noting strong balance sheets and good management will make the difference. Laidler notes that at 6.5x 12-month forward PE ratios, LatAm companies are trading well below the 10.7x average of the past 15 years.

Domestic Fortitude
Finding the sectors and companies that outperform during recovery, whether it comes in late 2008 or mid 2009, is the big question facing investors. A consensus appeared to be building around names whose businesses rely on domestic consumption. With strong internal growth rates and solid fundamentals, including relatively low inflation and a committed central bank, Brazil falls in the sweet spot for most investors looking to jump back in.

“Brazil has an opportunity to expand its domestic demand,” says Bosch. Being a recipient of $30 billion in swap lines from the Fed is a major endorsement that provides a financial boost to the country’ economy, he adds.

“EM countries are having strong growth. China and Brazil probably won’t decelerate as much as other countries,” says Carlos Eduardo Ramos, portfolio manager at Bank of New York Mellon’s ARX Capital, in Rio de Janeiro, which manages close to 7 billion reais.

Ramos sees a strong bounce back in companies with exposure to domestic demand, such as Wilson & Sons, Lupatech, Marco Polo, Cesp, Equatorial and Bematech, as well as in global industrial and commodity-related companies like CSN, Gerdau, Usiminas and Vale. While his bottom up portfolio strategy involves holding the paper for years, rather than weeks or months, Ramos sees annual IRR of up to 30% on his positions over the coming four years. LF