Peak-to-Trough Opportunities in Latin America

12/22/2011 9:00 am EST

Focus: GLOBAL

Rudy Martin

Editor, Investing Insight

Latin American markets don’t get the play that specific countries like Brazil get, but on the whole they’re doing much better than their North American counterparts, writes Rudy Martin of Latin Stock Investing.

With dominant Latin American economies humming along—albeit at a somewhat muted pace, thanks largely to the bleak business and credit conditions in Europe, North America, and parts of Asia—the dominant financial event of the year was the bear market that slammed stock prices in the region’s major stock markets.

The recoveries of Latin America’s stock markets from the 2008-2009 bear market were stopped in their tracks in the spring of 2011 by talk of an economic slowdown in Asia and a possible double-dip recession in the United States. Progressively more dismal reports about credit conditions in southern Europe, coupled with tumbling commodity prices, pounded stock prices relentlessly downward.

While some mild signals of encouragement about the US and Asian economies, along with whispers of hope about the European debt imbroglio, have lifted Latin American stock quotes off their November troughs, it is likely to be a number of months before we can declare that the bear market is history. So as much as I would like to declare that this review is a postmortem for the 2011 Latin American bear market, that would be premature and irresponsible at this time.

The S&P 500 index failed to dip appreciably below the 20% recovery peak-to-trough threshold that most investors consider a bear market, but the major Latin American indices hardly paused to glance around as they tumbled by their respective minus 20% markers in the southward plunges.

Although Mexico’s Bolsa gauge didn’t sink below the minus-20% bear market threshold, prices of Mexican-domiciled companies listed on US exchange quoted in dollars suffered downdrafts of considerably worse than 20%.

The reason is that the Mexican peso tumbled considerably—more than 10% relative to the greenback—during the nation’s stock market slide. That resulted in spills for Mexican stocks quoted in US dollars of far worse than 20%.

In fact, the worst hit US-listed Latin American stock during the market’s 2011 cascade was Mexican cement giant Cemex SAB de CV (CX), which took a peak-to-trough shellacking of 78.83% so far this year. Cemex, which dominates the cement business in the Western Hemisphere and has major pieces of the business in other parts of the world, suffered because of weak demand in the United States, as well as concerns about liquidity issues.

In the broad sector of building, a Mexican home builder and a general construction firm joined as members of the five hardest-hit Latin American stocks. Of the major US dollar-denominated Latin American stocks, only Colombia’s Ecopetrol SA (EC), with a high-to-low setback of 19.14%, managed to suffer a loss of less than 20% during this year´s market implosion.

Some investors subscribe to the notion that stocks worst hit during a market downturn will rebound the highest during the subsequent upswing (as a bounce of well over 100% by Cemex following the late-November market trough demonstrated).
Others feel that the stocks that hold up best during a market spill will continue to show superior relative performance during the market´s recovery.

I withhold judgment on these theories for now, instead evaluating the fundamentals of all the major US-listed Latin American stocks. Political tides, economic trends, commodity prices, management changes, now offerings of products and services, and countless other considerations factor into our recommendations.

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