Latin American stock markets look ripe for profit taking after their rocket-like moves of recent weeks. But expand your time horizon and the allure of these markets isn't much changed from 1993, many pros say: The long-term growth potential remains far better than that of U.S. stocks as a whole--if you can handle the volatility.
In Mexico City, the Bolsa stock index eased 3.44 points to 2,755.53 on Tuesday. The Bolsa has surged 12% since July 29, betting on the ruling party's victory in Sunday's presidential election.
In Sao Paulo, Brazil, the Bovespa index gave up 1.5% on Tuesday, after soaring 28% the past three weeks. Brazil, too, faces an election (in October) and also is in the midst of its eighth anti-inflation plan in 12 years. Investors have been optimistic on both fronts, though the buying may have become too frenzied, some money managers warn.
Because their markets are Latin America's biggest by far, Mexican and Brazilian stocks automatically dominate Latin American investment funds. So their prospects are key to Latin funds' performance, short- and long-term. Here's how some pros view Mexico and Brazil now:
* Mexico. The Bolsa index is up 5.9% year-to-date, but to get this far investors had to weather an Indian rebellion, political assassination and an economic slowdown--all of which helped crush the index to as low as 2,000 in spring.
While ruling party candidate Ernesto Zedillo's victory Sunday assures that Mexico's free-market economic reforms will remain in place, investors' concern now is profit growth.
William Truscott, co-manager of the Scudder Latin America stock fund in New York, has 37% of the fund's assets in Mexico. But he concedes that "we're a bit cautious" now on the market. "Stock values are not extremely compelling" in light of weak first-half corporate earnings, he says.
Investors are expecting Mexican firms' earnings to grow at a 20% to 30% annual clip longer-term, Truscott says, but that will only be possible if sales growth also picks up--the missing element so far. In the meantime, he notes, the market isn't cheap, with many stocks selling for 15 to 20 times estimated 1994 earnings or higher.
Until sales growth comes, Truscott is focusing on what he terms the best-managed Mexican companies whose businesses can't be readily duplicated by hungry U.S. competitors: Phone giant Telmex, for example, and retailer Cifra, which has formed a joint venture with Wal-Mart.
Geoffrey Dennis, Latin stock strategist with Bear, Stearns & Co. in New York, agrees that Mexican stocks are due for a pause. But he still sees the Bolsa index reaching 3,150 by year's end. "I think that because a lot of investors have missed this rally, any correction will be limited."
Under Zedillo, and with the help of free trade, Dennis sees Mexico growing 5% a year, versus 3% annually over the last six years. His favorite plays: Infrastructure stocks, such as construction firm Empresas ICA; and banks like Bancomer, whose earnings should rise as Mexican interest rates fall.
* Brazil. Many Latin fund managers are vastly more excited about Brazil than Mexico, even though the Bovespa index is up more than 60% this year in dollar terms, and even though a selloff is overdue. "We think the market can at least double again" before it reaches expensive levels, says Soraya Betterton, manager of the GT Latin American fund in San Francisco.
As with Mexico, the near-term optimism in the Brazilian market rests on the expected victory of a free-market presidential candidate--in this case, Fernando Cardoso. It is his anti-inflation plan that took effect on July 1, giving Brazil a new currency and an economic program designed to bring down an inflation rate that routinely topped 500% a year.
In less than two months, the plan has cut inflation to 5% a month. F. Rowe Michels, analyst at Latin stock specialist D.A. Campbell Co. in Los Angeles, says the market is sensing that if this program works--admittedly still a big 'if'--"Brazil is headed toward economic and political stability that will allow Brazilian companies to make much more efficient use of their assets."
And because Brazilian firms already are considered among the best-managed in Latin America, their potential in a true working economy has investors wide-eyed. With many stocks priced at just 10 to 15 times estimated 1994 earnings, Brazil "is going a lot higher if the anti-inflation plan works," says Truscott.
The Latin Funds
Here are mutual funds that target Latin American stocks. Note that most of these funds charge a redemption fee if you exit before a set period of time has passed.
Total return: Fund 1993 1994 GT Latin America B * +44.3% +14.6% Scudder Latin America * +74.3% +13.7% UST Emerging Americas +40.9% +7.9% T. Rower Price Latin Am.* NA +7.3% Fidelity Latin America +62.1% +4.1% Dean Witter/TCW Latin Am.* +46.8% -0.1% Keystone Fund of Amer. B * NA -3.6% Avg. international fund +39.4% +5.1% Avg. U.S. growth fund +10.6% -0.7%
1994 data through Monday
* Indicates no-load fund NA (not available; fund was new in '93)
Source: Lipper Analytical Services