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WALL STREET, CALIFORNIA | MANAGER'S FORUM

Synchronicity

Morgan Stanley's Andy Skov sees economic expansion taking place throughout Latin America as post-peso-crisis fears ease.

June 17, 1997

Latin American stock markets have been explosive this year, far outpacing even the spectacular gains in the U.S. stock market.

Andy B. Skov, a San Francisco native, has been co-manager, along with Robert L. Meyer, of the Morgan Stanley Latin America stock fund since its inception in 1995.

Skov joined Morgan Stanley three years ago after a four-year stint at Bankers Trust New York Corp., where, as a member of the Latin American corporate finance group, he lived in Argentina for two years doing equity research and mastering Spanish.

Skov, 31, a Phi Beta Kappa graduate of UC Berkeley who majored in political science and economic development, also picked up Portuguese on the job at Morgan Stanley because of the importance of Brazil to the firm's investments.

He was interviewed at his New York office by Times staff writer Thomas S. Mulligan.

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Times: What are the big themes in Latin America now?

Skov: Economically, we're having for the first time in many years a synchronized expansion throughout the region, although different economies took different routes to get there.

Secondly, the giant wall of worries that all bull markets have to climb was erected very high after the Mexican [peso] devaluation in 1994. Since then, with the restoration of solid economic fundamentals and a continuation of the reforms, we've started climbing that wall of worry.

A third theme, which has really been the biggest engine for the market overall, is privatization in Brazil. In other countries, government-owned companies didn't trade on the exchanges. They were usually sold to strategic investors and only later were floated onto the stock market. By the time public investors got access to them, two to three years into the process, a lot of the earnings growth had already taken place. In Brazil, though, you have government majority-owned companies that are slated to be fully privatized but have been listed on the exchange for years. So investors are able to participate from the earliest stages in the expected earnings growth explosion that's going to come from privatization.

Times: What's happening in the other big economies?

Skov: Chile, ironically, was growing too fast, and last year the government tightened monetary policy to slow down the economy.

Mexico and Argentina are both in similar stages of recovery, although Argentina's recovery has been much more robust, in part because their recession was much less severe. Argentina is probably going to grow between 6% and 7% this year.

Times: What is leading the growth in those two countries?

Skov: In Mexico, it's been exports. In Argentina, domestic investment, especially in infrastructure and mining. There's been a great agricultural recovery as well because of high food prices worldwide. The consumer sector in both countries has been relatively weak. We expect a consumer recovery, but we don't think it will be particularly strong.

Times: And yet I see your fund holds a number of retailers.

Skov: We're very active in retail because of a trend we think will continue over the next 10 years, which is the replacement of small ma-and-pa stores with larger-format franchise chains. It's something that Wal-Mart Stores has done in this country for 20 years, and now it's happening in Latin America. We're investing pretty aggressively in companies leading that change.

There's Santa Isabel in Chile, Disco in Argentina, Lojas Renner, Lojas Arapua and Pao de Acucar--all in Brazil--and Soriana and Cifra in Mexico.

Times: Wal-Mart likes Cifra too--they just announced that they're buying a controlling stake.

Skov: People always tell me, "Oh, if you like retailing in Latin America, why not just buy Wal-Mart because they're going to kick the pants off these Latin American retailers." But the fact is, Wal-Mart hasn't necessarily done better than the Latin American retailers they've gone head-to-head against. Wal-Mart's buying Cifra is an admission that they need local expertise.

Times: What kind of price-to-earnings multiples are you paying for stocks in Latin America?

Skov: Our portfolio right now trades at between 13.5 and 14 times 1997 earnings. Our projected earnings-per-share growth for those companies for 1997 is 18% to 20%, and we expect roughly 17% to 18% growth for 1998.

Times: Those P/Es are lower than the average for New York Stock Exchange companies now. Would you say the Latin American stocks are cheap?

Skov: Latin America has always been talked about as a great cheap market and a "value" play. But the problem with playing value is that by definition it's a short-term view. If you buy something because it's cheap, that means you're going to sell it when it's less cheap, as opposed to buying something because you think it's growing and just let it grow.

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