In Latin America, there are three major stock markets: Brazil, Mexico, and Argentina. The other markets, including Peru, Colombia, Venezuela, and Chile, are too small and lack sufficient depth.
Latin American stock market returns: 2001
Local currency | USD | |
---|---|---|
IPC-Mexico | 12.74% | 18.46% |
Bovespa-Brazil | -11.02% | -24.90% |
Merval-Argentina | -29.12% | -29.12% |
S&P 500 | -13.04% | -13.04% |
Source: IDEAglobal
We predicted last year that Mexican stocks were the best option for Latam-focused equity investors, and we turned out to be right. Mexico's IPC was the only index with positive returns out of the three largest equity markets in the region. We believe that attractive valuations in Mexico were the main reason behind these returns. The global economic slump did not affect Mexican stocks to a great extent, as the growth for local companies in the retail and telecom sectors continued to be strong. Mexico's IPC index also outperformed the S&P 500 index.
Brazilian stocks were affected by the depreciation of the real, the crisis in Argentina, and the domestic energy crisis. In Argentina, stocks suffered as the country is unable to get out of recession and the country defaulted on its foreign debt. We recommend avoiding Argentine exposure as much as possible, as the devaluation could seriously impair the financial position of many Argentine companies. An economic turnaround seems out of sight, and investors have no confidence in the Argentine economy.
Market size: end 2001
Country | Number of stocks | Market capitalisation (USD) |
---|---|---|
Argentina | 108 | 205.0bn |
Mexico | 171 | 126.6bn |
Brazil | 425 | 185.0bn |
Colombia | 160 | n.a. |
Ecuador | 30 | 1.7bn |
Chile | 277 | n.a. |
Venezuela | 63 | 6.2bn |
Peru | 230 | 5.7bn |
This year, we believe Mexico is once more the best alternative among Latam stocks. Mexico is in a better position to benefit from an economic recovery in the US than the other two countries, due to its membership of NAFTA. Mexico is more isolated from the Argentine crisis, as Brazil has closer ties to Argentina than Mexico. Standard & Poor's raised Mexico's debt rating to 'investment grade', after Mexican legislators approved a fiscal package expected to improve the country's public finances. The investment grade rating by S&P 500 signals that Mexico's country risk has improved, which would lower the weighted cost of capital for Mexican companies resulting in higher stock valuations.
Despite their stronger performance, Mexican stocks continue to have the best valuation in comparison to the US, Brazil, and Argentina. The IPC has the lowest earnings multiple out of all these markets. The Merval's low P/E is not a buy signal, but a reflection of poor economic outlook and extremely high uncertainty. Argentine companies have no earnings visibility, so there could be large estimation errors of future earnings. In the case of Mexico, we have improving economic fundamentals and relatively lower valuations, which is why we favour Mexican stocks over their Brazilian and Argentine counterparts. The IPC has had a robust performance in the last quarter of 2001, as it rebounded with US stocks and on expectations of the approval of the fiscal reform.
Price-earnings ratios: Feb 2002
Trailing P/E | Forward P/E | Div. yield | |
---|---|---|---|
Mexico-IPC | 16.37 | 12.71 | 1.43% |
Brazil-Bovespa | 17.01 | 19.13 | 4.69% |
Argentina-Merval | n.a. | 8.22 | 3.63% |
US-S&P 500 | 61.53 | 21.92 | 1.40% |
Source: I/B/E/S Estimates
Favourite picks in Mexico
Sector picks
In terms of industries, we favour telecommunications and beverages. Banks had a good run last year, as they benefited from restructurings, lower domestic interest rates and merger activity. We are not so bullish on banks this year because the Central Bank has recently adopted a tighter monetary policy that will add upward pressure on local interest rates, which will affect the demand for loans. In addition, we expect less cost reduction from integrations and decreased merger activity. Within the telecommunications sector, we expect the wireless sector to continue generating solid growth, although at a slower pace than in recent years. Wireless penetration has already reached 20% in Mexico, and competition is intensifying between companies in the sector. We are enthusiastic about the beverage sector because we believe that domestic demand will remain strong and companies in the sector should benefit from a recovery in the US through an increase in exports.
Stock picks
We believe it is important to concentrate on the most liquid stocks and industry leaders:
America Movil [BMV: AMXL; NYSE: AMX]: America Movil is Latin America's largest wireless company with a total of 26.6 million subscribers as of December 2001. The company was spun-off from Telefonos de Mexico in February 2001. America Movil had phenomenal subscriber growth last year, as its equity subscriber base rose 76% in 2001 to 22.8 million subscribers. EBITDA rose 106% to MXN12.49bn. America Movil has investments in wireless companies in several countries in Latin America, including Mexico, Brazil, Colombia, Guatemala, Argentina, and Ecuador. AMX constitutes an investment vehicle for the Latin wireless sector. IDEAglobal has a BUY recommendation on the stock with a price target of 10.40 pesos for the local shares and 22.50 for the ADRs.
Grupo Iusacell [BMV: CELV; NYSE: CEL]: Grupo Iusacell is Mexico's second largest wireless company, after America Movil's Mexican subsidiary Telcel. Iusacell had 1.697 million subscribers as of September 30, 2001. The stock has been out of favour in the last two years losing 84% from its all-time high in February 2000. The stock fell under pressure from concerns over capital funding and from a broad sector sell-off. We believe that the decline in the stock has been overdone. In fact, the stock has recovered 57% since September 2001 lows. IDEAglobal has a BUY recommendation on Iusacell with a price target of 3.92 pesos for the local shares and 4.20 for the ADRs. Both America Movil and Iusacell have a high correlation with Nasdaq. We expect these stocks to rise once the technology sector recovers.
Telefonos de Mexico [BMV: TELMEXL; NYSE: TMX]: Telefonos de Mexico (Telmex) is Mexico's largest fixed telecom services provider. Telmex owns close to 95% of Mexico's fixed lines. The company's stock is the most heavily weighted stock in the IPC, and is also one of the most liquid stocks on the Mexican Stock Exchange. Telmex recently reported higher than expected line additions in the fourth quarter. Excluding extraordinary costs and asset write-downs, results were within expectations. Telmex's long distance business has been affected by the economic slowdown, but this is offset by high growth in other areas such as data and Internet. IDEAglobal has a BUY recommendation on Telmex with a price target of 21.00 pesos for the local shares and 46.00 for the ADRs.
Fomento Economico Mexicano [BMV: FEMSAUBD; NYSE: FMX]: Fomento Economico Mexicano (Femsa) is Latin America's largest beverage company. Femsa is an all-integrated beverage company, whose segments include beer, soft-drinks, retail, packaging, and logistics. Femsa trades only at 4.1 times expected 2001 EBITDA, a steep discount to comparable companies. Its beer subsidiary Femsa Cerveza is Mexico's second largest brewery, while its soft-drinks bottling unit Coca-Cola Femsa is Mexico's largest Coke bottler. IDEAglobal believes that Femsa's stock is undervalued based on relative valuation with comparable companies. IDEAglobal has a BUY recommendation on Femsa with a price target of 39.30 pesos for the local shares and 4.20 pesos for the ADRs. In the first quarter of 2002, Femsa's stock price has moved closer to our price target based on solid fourth-quarter results of its beer unit.
Grupo Modelo [BMV: GMODELOC]: Grupo Modelo is Mexico's largest brewery with a 61% domestic and export market share. Modelo produces the world-famous Corona Extra, the best-selling Mexican beer in the world and the No. 1 import beer in the US. Modelo is also the exclusive-importer of Anheuser-Busch beer in Mexico, which includes the Budweiser brands. IDEAglobal has a BUY recommendation on Modelo with a price target of 24.20 pesos. We expect Modelo's sales to strengthen in tandem with an economic recovery in Mexico and the United States and to continue generating a stable cash flow stream.
TV Azteca [BMV: TVAZTCPO; NYSE: TZA]: TV Azteca is Mexico's second largest TV broadcasting company. TV Azteca operates two national TV channels in Mexico, as well as other stations in the country. Last year, TV Azteca launched Azteca America, which currently covers 28% of the US Hispanic market. We believe that TV Azteca has excellent growth opportunities from its US venture Azteca America, which represents an avenue to attract more advertisers to target the demographically appealing US Hispanic population. TV Azteca recently announced that its fourth quarter EBITDA rose 40% in dollar terms compared to the same period last year in addition to record-high advertising presales for 2002. IDEAglobal has a BUY recommendation for TV Azteca and a price target of 6.20 pesos for the local shares and 10.70 for the ADRs.
Grupo Elektra [BMV: ELEKTCPO; NYSE: EKT]: Grupo Elektra is Mexico's largest specialty retailer and consumer finance company. Elektra specialises in the sale of consumer electronics and household appliances. Elektra has a significant presence in other Latin American markets, including Peru, El Salvador, Honduras, Guatemala, and the Dominican Republic. The company's sales are sensitive to economic cycles due to the nature of the merchandise. As a result, sales were affected last year and the stock fell out of favour dropping 25.3%. Although the stock has recovered 37.5% from October lows, we believe that the stock trades at an extremely steep discount to similar companies. Elektra currently trades at 4.31 times EBITDA compared to an average of 12.60 times for three comparable companies. IDEAglobal has a BUY recommendation on Elektra with a price target of 7.90 pesos for the local shares and 8.60 for the ADRs.
Favourite stock picks in Brazil
We believe that this year won't be a particularly good year for Brazilian stocks in general. The Brazilian stock market will be affected by the uncertainty from the Presidential elections, as well as contagion from the Argentine crisis and the global economic slowdown. The upgrade of Mexico to investment grade will shift foreign investment away from Brazil and into Mexico on the basis of lower country risk. Brazil is further constrained by higher local domestic interest rates than Mexico. High interest rates may deter investors from buying stocks when they can get better return-risk results with fixed income. On a positive note, the Brazilian government has announced the end of the energy rationing that affected the productivity of local companies. Although we prefer Mexico over Brazil, we believe that there are a few good opportunities in Brazil among carefully selected sectors and stocks.
Sector and stock picks
In Brazil we favour fixed-telecommunications, banks, and pulp. We also recommend positions in the industry leaders with the most reputable management and strongest brand names.
Telecomunicaciones de Sao Paulo [BVSP: TLPP4; NYSE: TSP]: Telecomunicaciones de Sao Paulo (Telesp) provides local fixed-telecommunications services to Brazil's wealthiest and most populated state, Sao Paulo. The company provides voice, data, and video telecom services to individuals and corporations. Telesp is controlled by Spain's Telefonica [NYSE: TEF], a dominant telecom player in Spain and Latin America with a solid track record. Telesp trades at an inexpensive price-to-earnings ratio of 10.00, while net income rose 25.00% in the first half of 2001 as a result of line additions and improving operating margins.
TeleNorte Leste [BVSP: TNLP4; NYSE: TNE]: TeleNorte Leste (Telemar) is Brazil's largest fixed-line telecommunications company covering 64% of the country's area including 16 states in Brazil's northern, northeastern, and southeastern regions. Deregulation of Brazil's telecom industry could largely favour fixed-telecom players allowing them to expand their areas of coverage and to offer more services.
Brasil Telecom [BVSP: TEPR4; NYSE: BRP]: Brasil Telecom provides fixed-line telecommunications services in the state of Parana. The company is Brazil's third largest fixed-line operator with 10 million lines. As the government deregulates the telecom sector, the largest fixed-line operators should be the winners because they already have large networks and infrastructure in place.
We are also optimistic about the long-term prospects of Brazil's largest financial institutions, Banco Bradesco [BVSP: BBDC4; NYSE: BBD], Banco Itau [BVSP: ITAU4], and Unibanco [NYSE: UBB]. Although local interest rates remain high, the Central Bank of Brazil is likely to cut interest rates in the absence of inflationary pressures.