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 Business News | January 2006 
Latin Shares Look Set To Gain Again
 Ludwig Marek - Bloomberg News
The last time Latin American stocks rose for three straight years, the rally ended in 1994 with the Mexican peso crisis. This time around, Latin shares appear set to continue rising for a fourth straight year in 2006.
Nicholas Morse, who manages a Latin American stock fund that gained 81 percent last year, is among investors who say that lower lending rates and growing economies will propel earnings growth. His picks include companies like Banco Bradesco of Brazil and América Móvil of Mexico, the leading cellphone service provider in the region.
The Morgan Stanley Capital International index of Latin American stocks rose 45 percent last year, far exceeding the 21 percent rise in the MSCI gauge for the Asia-Pacific region as well as benchmarks in the United States and Europe. Financial, telecommunications and housing stocks were among the top performers.
"There will be a pickup in consumption and credit," said Morse, a money manager at Schroder Investment Management in London, which oversees the SEB Latinamerikafond for SEB Group of Sweden. The fund led the 57 that specialized in Latin American equities last year, according to data compiled by Bloomberg. Morse raised financial stocks to 19 percent of the fund's holdings, from 12.2 percent a year earlier, on expectations of profit growth for Brazil's banks.
Shares of Banco Bradesco, the biggest bank, in terms of assets, that is not owned by the Brazilian government, more than doubled last year. The benchmark Bovespa stock index rose 28 percent. In Mexico, América Móvil soared 60 percent, compared with a 38 percent gain in the country's Bolsa index.
Investors in 2005 poured a net $4.5 billion into Latin American equity funds, according to Emerging Portfolio Fund Research in Boston, the most in the firm's nine years of data.
Central banks probably will keep cutting interest rates after Mexico's inflation rate fell to a record low in November and Brazilian price increases slowed to 5.9 percent annually, from a 16-month high of 8.1 percent in April, investors say.
Housing companies were among the biggest gainers last year on Mexico's Bolsa as international investors bet that lower borrowing costs would lift demand for homes.
"We definitely like the mortgage play in Mexico," said Gabriel Csendes, a fund manager in Zurich for the UBS Equity Fund-Latin America. The fund raised its holdings of Grupo Financiero Banorte, a big Mexican bank, to 4.3 percent of assets at the end of November, from 2.55 percent at the start of 2005. Shares of Banorte rose 27 percent last year.
Maria Gordon, who oversees the Goldman Sachs Emerging Markets Equity Fund in London, said, "We are seeing a rise in the middle class." Gordon added, "When the rates come down, the affordability of things goes up."
Some investors sold shares linked to Latin America's domestic economies on concern that their prices have climbed higher than justified by their profit potential. The MCSI Latin America Financials index more than quadrupled in the past three years, including a 79 percent surge in 2005.
William Landers, a portfolio manager at Merrill Lynch, said that Latin America offered more potential for gains than any other region.
Stocks in the MSCI Latin America index trade at 11.8 times 12-month forward-looking earnings, compared with 13.4 times in shares included in the MSCI Emerging Market Asia index and 18.4 times in shares listed on the MSCI Emerging Markets Europe index.
"It really doesn't make any sense to us how cheap it still is," said Landers, in Plainsboro, New Jersey, who manages the Merrill Lynch Latin America Fund. He said that he expected profits at companies in his portfolio to increase as much as 30 percent.
The MSCI Latin index turned downward in December 1994 when Mexican leaders unexpectedly devalued the peso after pledging not to. The index fell 15 percent in 1995; the region's markets did not recover until 1996, when the Bolsa gained 18 percent in dollar terms on a 5.1 percent expansion in Mexico's gross domestic product. The MSCI index has risen an average of 51 percent a year for the past three years. |
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