With skyrocketing inflation, unstable regimes, and other problems that have plagued South America in recent years fading from the picture, the outlook for investments in the region appears bright this year.
Looking out at 2006, Standard & Poor’s remains bullish on Latin American equities based on a view of strong earnings growth coupled with attractive valuations.
Alec Young, a Standard & Poor’s equity market strategist, thinks prospects for the region look good because inflation there, which had been among the highest in the world a few years back, has been decreasing, as have interest rates. At the same time, the region has become less volatile politically as democracy has increasingly taken hold.
Companies south of the border have also benefited lately from strong demand for oil and raw materials from China, India, and the U.S. Meanwhile, at home, growing middle classes with fattening incomes have been clamoring for things like cars and appliances, further spurring economic growth on the continent, Young said.
Given this backdrop, Standard & Poor’s estimates that companies in its Latin America 40 index will be able to increase earnings by 12% this year. The index includes the largest companies with the most liquid stocks in Brazil, Mexico, Chile, and Argentina, but the first two countries account for the vast majority of its holdings — 87%.
The index was up 50.2% in 2005, making Latin America the best performing regional equity market in the world for the 12-month period. By comparison, the S&P 500 index, a broad gauge of the U.S. stock market, gained 4.9%.
Paul Rogers, lead manager of the Scudder Latin America Fund (SLANX), shares Young’s optimism about the region. He feels companies there can increase sales by 10%-12% and improve earnings before interest, taxes, depreciation, and amortization by about 15% this year.
Among individual companies, Rogers likes Petroleo Brasileiro S.A. (PBR), a Brazilian oil and natural gas company known as Petrobras, because of its global operations, and because he expects its production to increase.
Another of his favorite companies is Companhia Vale do Rio Doce (RIO), a Brazilian iron ore producer that he sees as a beneficiary of demand from China. The company and Petrobas were among the largest holdings in the $700 million fund at the end of last year.
At that time, other top holdings in the fund, which has the bulk of its assets in Brazil and Mexico, included two Mexican companies: America Movil SA (AMX), which provides wireless communications services, primarily in South America; and Cemex SA de CV (CX), a cement company that Rogers said is the largest supplier of that material to the U.S.
Scudder Latin America returned 52.1% last year, while the average Latin America fund gained 53.9%. The T. Rowe Price Latin America Fund (PRLAX), which was up 60.1%, was the best performer in the group, which, excluding multiple share classes, features only a handful of funds.