Latin Flair

01/28/2005 12:00 am EST


Elliott Gue

Editor and Publisher, Energy and Income Advisor and Capitalist Times

"Rich in natural resources and increasingly trade-friendly, South America offers 'Latin flair' for investors," say Elliott Gue and Yiannis Mostrous, contributing editors to Personal Finance. Here, they offer a review of the best ways to play the region’s growth.

"South America has become much friendlier to investors. Countries like Brazil, Chile, and Peru have reduced their reliance on external debt and implemented sound fiscal and monetary policies. These reforms have led to far greater economic stability. South America is gaining attention as a key source of basic commodities. In particular, the region has vast reserves of iron ore, copper, and even oil and natural gas. Brazil and Argentina are also major exporters of agricultural products. What’s more, the region is becoming the first stop for commodities for resource-hungry countries like China. While the long-term case for investing in the region is sound, it isn’t without risks. Early in 2005, local stock markets saw corrections—investors in the region should be prepared to endure periodic market volatility.

"As expected in the beginning of 2005, the Brazilian market finally had a correction, falling over 7%. That said, there’s value in select Brazilian stocks, especially for long-term investors. Further, Brazil cut its capital gains tax on equities from 20% to 15%, effective January 1, 2005; that’s yet another step in the right direction. Turning to the economy, the major positives are the solid domestic consumer demand and the rise in consumer confidence. In addition, the favorable commodities environment continues to support Brazil’s external financial position.

"Short-term market gyrations notwithstanding, the easiest way to invest in Brazil is through the Brazil Fund (BZF NYSE). But if you want some individual company exposure, there are some great opportunities in domestic consumer companies, given our assessment that the Brazilian economic recovery has a big domestic component in it. Our favorite is Brazil Telecom (BRP NYSE), a provider of telecom services to consumers, businesses, and governments in southwestern Brazil. The company is in an expansion mode (wireless business) while experiencing large free cash flows. Keep in mind that this is a company that doesn’t have a great deal of exposure in the US yet, and can surprise on the upside, offering excellent returns. Expect to endure some turbulence while holding this stock. Buy Brazil Telecom below 35.

"As recently as 2002, Argentina was embroiled in an economic and political meltdown that led to a deep recession and the largest sovereign debt default in history. In early 2002, then-president Fernando de la Rua was ousted by an angry mob of protesters. His successor sharply devalued the peso and defaulted on the nation’s more than $100 billion in debts. There’s been some recovery since the trough of the 2002 recession but Argentina still has a host of economic problems that need to be addressed in coming years. Nevertheless, it would be a mistake to completely ignore Argentina. The country is rich in natural resources and is an important exporter of the agricultural products that Asia most desperately needs.

"Our favorite play on the market is Cresud (CRESY NASDAQ), a major producer and exporter of grains, milk and beef cattle. Cresud has been adding to its herd in recent quarters and now owns about 95,000 head of cattle. In September 2003, the discovery of foot-and-mouth disease in Argentina limited the company’s access to important foreign markets like the US. But Argentina has been disease-free for over a year, so it’s likely the export restrictions will come down this year. Firm pricing for cattle, up more than 50% since 2002, should boost profitability in this segment. Cresud also raises corn, wheat and soybeans. Soybeans are in particularly high demand in Asia because soy protein is central to human and livestock diets. The increasing demand is pushing prices higher. Buy Cresud under 15.

"Peru has transformed economically in the past few years. Gone are the days of rampant inflation and profligate government spending. Recent reports suggest the government of President Alejandro Toledo has maintained a high degree of fiscal and monetary discipline. Also encouraging is a number of new free-trade deals, including a bilateral free-trade agreement with the US that opens the US to Peru’s agricultural and mineral exports. China, in particular, has become an important trading partner and imports large quantities of copper from Peru.

"Southern Peru Copper (PCU NYSE), a miner, smelter, and refiner of copper, is a backdoor way to play strong Asian demand. The company is 14% owned by Phelps Dodge, the US mining giant. And Grupo Mexico, the world’s third-largest copper company, has a majority stake. In fact, Grupo plans to merge its copper mining operations with Southern Peru to create the world’s largest privately held producer. A deal between Grupo Mexico and Southern Peru would make the company a dominant force in world copper production. But when buying Southern Peru be prepared for significant volatility—the stock is very sensitive to any news surrounding Chinese demand for copper. Buy Southern Peru under 47.50.

"Chile is hot. President Ricardo Lagos’ administration has a proven track record of solid economic management. Last year, Chile finalized trade agreements with both the US and EU. Potentially more exciting are the company’s proposed agreements with China and India; negotiations began at the end of last year and most expect some sort of a deal to emerge in the first half of 2005. Because Chile is the world’s largest copper producer, the nation’s growth is closely tied to copper pricing. Large surpluses and strong foreign direct investment are expected to continue this year.

"Compania de Telecomunicaciones de Chile (CTC NYSE) is Chile’s largest fixed-line telecom operator. In total, this company owns 90% of Chile’s local telecom market and about a third of the long distance market. Spanish telecom giant Telefonica holds more than 40% of TeleChile and agreed to purchase its mobile subsidiary for a combination of cash and the assumption of debt. That deal leaves TeleChile a solely fixed-line operator. This business isn’t growing. In fact, the company is losing some customers to the mobile operators. But TeleChile is a solid dividend play and management’s restructuring plan will boost cash flows, allowing the company to support its near 8% dividend yield. Specifically, TeleChile has reduced its workforce and is gradually eliminating its debt—the debt-to-equity ratio has fallen from more than 70% in 1999 to less than 50% at the end of 2003. Buy TeleChile below 12."

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