Latin America is bouncing back, and stock markets are bubbling again. As worries over currency and political volatility in Mexico, Brazil, and Argentina have faded, equity markets have surged from a seven-month low in mid-October. But market watchers say bargains still abound.
How can you play the rally? Regional mutual funds are one way, of course. But another easy route is via American depositary receipts of Latin American companies. ADRs, which trade on U.S. exchanges and can be bought through any broker, are certificates that represent ownership of foreign shares. Buying an ADR of one of the more than 80 Latin companies that issue them allows you to avoid the hefty taxes and bureaucracy you would face purchasing stocks directly.
WEB RESEARCH. To be sure, Latin stocks could be sideswiped by Y2K problems, a steep hike in U.S. interest rates, or political volatility leading up to July's Presidential elections in Mexico. But analysts are optimistic on all fronts provided U.S. rates don't do the unexpected and rise by more than three-quarters of a percentage point by yearend. Indeed, Salomon Smith Barney projects that after shrinking 0.2% this year, the region's gross domestic product will grow by 3.2% in 2000, led by Brazil, Mexico, and Chile. Analysts also believe that the winner of Chile's Dec. 12 Presidential election--which is currently too close to call--may eliminate restrictions on foreign portfolio investment. "Chile would see a boom if capital controls were lifted," says Anthony Daniell, director of Latin American equities at Warburg Dillon Read in London.
For now, however, analysts are most bullish on Mexican companies. With its modest price-earnings ratio of 12.3, Telefonos de Mexico is a good bet because of the company's recent emergence as a regional Internet power, says Geoffrey Dennis, Latin America equity strategist for Salomon Smith Barney in New York. In October, Telmex formed a $100 million joint venture with Microsoft to create a Spanish-language Internet portal.
Dennis also likes Mexican companies that will benefit from the robust local economy, such as retailer Cifra, which is 51% owned by Wal-Mart Stores and sells for 23 times estimated 2000 earnings. Another pick: Cement producer Cemex. It sells for a mere 8.6 times its estimated profit in 2000, according to Deutsche Bank Securities.
Brazil also earns high marks as it emerges from a less severe economic slump than many expected. Regio Martins, a So Paulo-based telecom analyst for Deutsche Bank, believes the ADRs of fast-growing phone company Telenorte-Leste could jump close to 24 from their current 18 5/8. But Walter Stoeppelwerth, head of research for Robert Fleming in Rio de Janeiro, favors fast-growing cell-phone operator Tele Nordeste Celular and commercial bank Unibanco. Tele Nordeste, valued at less than $600 per phone line, is cheaper than most of its global counterparts. Selling at six times next year's estimated profit, Unibanco is the best bargain among Brazil's large banks, says Stoeppelwerth.
Following Latin ADRs has never been easier, thanks to the Net. You can track company news and analyze stocks at J.P. Morgan's ADR Web site, www.adr.com. And Patagon.com (www.patagon.com), which provides access to Latin American brokers, offers useful analysis in English from the region's economists and journalists.
The new research tools will come in handy as a wave of new Latin stocks hit the market. In Brazil, commercial bank ItaPound and electric utility Eletropaulo Metropolitana are expected to issue ADRs next year. Several high-flying Internet firms will go public on Nasdaq, including Terra Networks, the spin-off from Telefonica of Spain's Latin American Internet holdings that will issue shares on Nov. 17. For investors who want to get in on the action before prices soar, now is the time to start studying Latin stocks.