Bulls Continue to Run in Latin America

Bulls Continue to Run in Latin America
Commodities Boom, Domestic Growth Spur Market Gains
By ANTONIO REGALADO and JOANNA SLATERMay 2, 2008
Mexico was supposed to bear the brunt of a U.S. recession. Someone forgot to tell investors there. Its stock market is up 2.5% this year.
RELATIVE STRENGTH

• Performance of some major indexes.
Across Latin America stocks are defying forces that have led to big losses elsewhere. Spurred on by the commodities boom, relatively strong domestic growth and cheap valuations, Latin stocks are among the best performers on a globe filled with dismal returns this year.
Just this week, Standard & Poor's upgraded Brazil's foreign-currency debt to investment grade, pushing the country's benchmark index to a record.
Accelerating inflation or a more severe global economic slowdown might still knock these markets down. But so far, they have been a much safer place for investors to park cash than other emerging markets.
Places like China and India have fallen sharply. Chinese stocks have lost almost a third of their value since the start of the year. European stock markets and Japanese shares also are way off. But Brazil's Bovespa index is up 6.2% this year. The main indexes for Chile and Peru are down only slightly.
It looked as if Latin America's five-year bull run might be over when stocks dropped sharply in January. But the region has turned in a surprise encore.
One reason: Latin stocks never reached the steep valuations that investors awarded companies in Asia during the past few boom years.
At the end of last year, a Morgan Stanley Capital International index tracking Brazilian stocks traded at about 15 times its components' earnings for the prior 12 months. For China, it was 27 times. As of the end of April, the Chinese index still was considerably more expensive than its Brazilian counterpart, despite the fall in Asian shares.
On the cheaper end are stocks in Argentina and Mexico, which are trading at roughly 10 or 11 times their expected earnings for this year, according to a Citigroup report.
"People are paying more attention to fundamentals and not throwing all emerging markets together as a quick trade," said Will Landers, who manages $8 billion in Latin American stocks at BlackRock Inc. "This region is still relatively cheap and delivering earnings results."
Latin indexes are heavy on big commodity names, like Brazil's Petroleo Brasileiro SA, known as Petrobras, and iron-ore producer Cia. Vale do Rio Doce. Investors seeking the safety of tangible assets have sent Vale's shares up about 100% since the credit crisis hit last summer.
Domestic growth in Latin economies also continues to surprise, driven in many cases by an expansion of consumer credit that stands in contrast to the U.S. credit crisis.
Brazil's economic output is expected to expand 4.8% this year, according to the International Monetary Fund, while Argentina is expected to increase 7%. Mexico, at 2%, isn't blistering, but also not as bad as some thought possible in the presence of a U.S. slowdown.
Also in Mexico, new rules allowing local pension funds to invest more heavily in stocks drew $650 million in new money into the market in March, said Damian Fraser, head of Latin equities at UBS Pactual.
Daniel Darahem, head of equity capital markets for Latin America at J.P. Morgan Chase & Co., said there is a lengthy queue of companies looking to list in Mexico amid enthusiasm for its shares.
While U.S. home-builder shares are down roughly 40% in the past 12 months, Mexico's Desarrolladora Homex SAB, which trades on the New York Stock Exchange, has seen its stock rise slightly during the same period. In Brazil, more than a dozen home builders went public last year, and investors are sniffing around in the sector after it sold off last year.
Stocks in the region have had their stumbles. Smaller companies, particularly in Brazil, have seen steep losses as investors dropped risky investments for blue-chip names.
New listings also have cooled sharply in Brazil, which has hit the shares of Bovespa itself, which listed in an initial public offering last fall.
In Mexico, where the economy depends partly on manufacturing exports to the U.S., some investors think that after the recent gains, its stock market doesn't have much pop left.
"You can't hide from the headwind, which is the slowing of the U.S.," said Pedro Martins Jr., senior Latin American equity strategist at Merrill Lynch & Co. "From now on, I think it's going to be giving mixed results."
An end to the commodity boom also could send these stocks south.
A different risk for the region is inflation. Latin governments are being forced to allow their currencies to appreciate to combat higher prices.
And late last month, Brazil's central bank raised its benchmark short-term interest rate for the first time in three years, a move aimed at preventing the kind of increase in inflation seen in places like China.
In Brazil, the central bank's targeted overnight lending rate is among the highest in the world, at 11.75%.
"Depending on how far it goes, that would also be an issue for the stock market," said Arminio Fraga, the former head of Brazil's central bank who now runs Gávea Investimentos, a $6 billion hedge fund.
Stronger currencies could hurt exporters. Meantime, higher interest rates crimp economic growth and send investors toward bonds and away from stocks.
Nikkei Edges Down 0.6% as FTSE Remains Flat
Japanese and Australian shares fell in holiday-thinned trading Thursday as investors booked profits in financial stocks, and shares in London were flat.
Markets in China, Hong Kong, Indonesia, Malaysia, Singapore, South Korea, Thailand, Taiwan, Vietnam, India and Pakistan were closed for holidays. Chinese markets will remain closed Friday. Japanese markets will be closed Monday and Tuesday for the Golden Week holiday.
In Europe, most markets were closed for May Day.
In TOKYO, the Nikkei Stock Average of 225 companies shed 0.6% to 13766.86. Resona Holdings led banking shares lower in the wake of the Federal Reserve's decision Wednesday to lower interest rates and its statement that "financial markets remain under considerable stress."
Analysts said the banking sector was overdue for a drop after a 14% rise in the Topix banking subindex in the previous three trading sessions. Resona fell 4%. Mitsubishi UFJ Financial Group fell 3.8%, while Sumitomo Mitsui Financial Group retreated 2.7%.
In SYDNEY, Australia's S&P/ASX 200 index eased 0.2% to 5585.80. Oil and gas producer Santos rose 9.3% in the wake of BG Group's bid for Origin Energy. Citigroup said Santos could become an acquisition target.
Origin, which surged 33% Wednesday on the bid, added 0.4%. Queensland Gas jumped 8.5%.
In LONDON, the FTSE 100 index closed unchanged at 6087.30. British Airways jumped 7.5% after saying it is in discussions with AMR Corp.'s American Airlines and Continental Airlines Inc. in what may be the first step toward creating a trans-Atlantic giant.
Thomson Reuters gained 3.3% after the financial-data company reported better-than-expected first-quarter net profit and sales, and gave optimistic projections for the newly combined business.