As one of the higher growth regions in the world currently, Latin American stocks - especially those in Brazil and other of the faster-growing economies - have seen impressive stock appreciation over the past 12-18 months. How much longer will the good times last? We spoke with Zacks senior Latin American market analyst
Claudio Frietas, CFA to find out.
What are your expectations for some of the key Latin American regions, heading into earnings season?
In general, Latin America is in a much better position to face a difficult economic environment this time. Even with the possibility of a recession in the U.S., Latin American economies should keep on growing and the companies' earnings should keep on improving in the short-term. I am concerned only with Mexico, since it has very close economic ties with the U.S. and for sure will be more affected by the difficult economic moment than Brazil, for instance, that is at this point more linked to high-growth economies like China.
In Brazil we have a curious economic situation: the Brazilian Central Bank raised rates last week (50 points), maybe the only Central Bank in the world raising rates nowadays. It is even more difficult to understand if we analyze that Brazilian basic rate is now 11.75% against inflation of 4.5%. Nevertheless, it seems to be just a mid-cycle adjustment that will raise rates now in order to prolong the ongoing economic recovery.
How is valuation on these stocks at this time?
Valuation for Latin American stocks remains attractive. After a difficult period in the beginning of the year, due to the subprime mortgage crisis in the U.S., the market has been recovering, mainly in Brazil. Nevertheless, valuations cannot be considered excessive; in fact there are very attractive stocks in the Brazilian telecommunication and electric utilities sectors. As a result of a more uncertain international economic environment, many investors are paying more attention to sectors that are exposed to domestic markets, which should reflect even better on those stocks that have lower than average valuations.
Is Brazil any closer to an investment grade designation? Is this already priced into Brazilian stocks?
Sure it is! Just some weeks ago Peru was upgraded to investment grade. This fact created a lot of jealousy in Brazil, and the Brazilian economic minister took a plane to New York to convince the rating agencies that Brazil was at least as good as Peru. Two days ago, a Japanese rating agency named R&I (Rating and Investment) upgraded Brazil to investment grade. It seems that we are getting closer each day - it can be announced any moment. I still believe the market can go up more 10% due to the investment grade announcement.
Which are your top Buy recommendations at this time?
The telecommunication industry remains quite interesting, particularly Telemar (TNE), Brasil Telecom (BRP) and Vivo (VIV). Electric utilities are also undervalued; CPFL (CPL) seems interesting too. The Brazilian real estate/construction business seems quite intriguing, mainly considering lower interest rates and the emergency of a growing mortgage business. In this sense Gafisa (GFA) is a great alternative for the medium term, though the 50-point rate hike last week in Brazil can create some short-term problems for the real estate sector.
Despite the difficult international business environment there are some interesting commodity stocks. Vale (RIO) is a must.
How would you advise investors to position themselves in Latin America in the near term?
The international environment is still risk-averse; however, there are some interesting opportunities in Latin America. I would recommend a considerable exposure in stocks that have good earnings trend coupled with below-average valuation. Brazil still seems to be a good option, even considering the less benign monetary policy.
Claudio Freitas, CFA is a senior analyst covering the Latin American markets for Zacks Equity Research.
