Latin America: All Eyes On Argentina

A foreign-debt default would hurt all Latin stocks

Investors in Latin America need to have tough hides. Few years go by without a crisis that sends foreign capital fleeing and bolsas plunging. Fair warning: Argentina is already shaping up as the 2001 trouble spot.

Two years of stagnation have brought this pivotal Latin economy to the brink of a foreign-debt default. Default would hurt stock markets from Santiago to Mexico City. It would shut Argentina itself, a major borrower, out of world markets, painfully delaying its chance of recovery. Borrowing costs would rise across the region. Argentina's creditors will do their utmost to prevent default, and an International Monetary Fund loan package negotiated in December should help. The loan will give Latin markets "a short-term pop," according to Geoffrey Dennis, Latin American equities strategist at Salomon Smith Barney. The Buenos Aires market--down about 24% this year--may rebound by up to 10%, led by banks and service companies such as Telecom Argentina.

BE PATIENT. Assuming Argentina stabilizes, most investors will put their eggs into two baskets: Brazil and Mexico. Brazil's economy should grow by about 4.5% next year, Salomon estimates. A U.S. slowdown could cut Mexico's growth in gross domestic product from its current blistering 7% a year to a rate on a par with Brazil's. Both economies can weather external shocks better than in the past and should generate strong consumer demand.

The paradox is that even if Argentina recovers quickly, the region's share prices may not. U.S. market woes often trump good company performance. That's the main reason Brazil's Bovespa index and Mexico's IPC index are down about 12% and 18%, respectively, in dollar terms this year. Eventually, says John Mullin, Latin American equity strategist at ABN Amro in New York, international institutional investors--whose presence still makes or breaks the thinly traded Latin markets--will see the diamonds in the rubble. "There comes a point where you have to recognize stocks' value," says Mullin.

In the interim, look for companies that serve domestic consumers, rather than exporters whose fortunes rise and fall with global trends. That's easier in Brazil, where international trade accounts for 18% of the economy, than in Mexico, where it's 58%. Telecom stocks--such as Mexico's Telmex and Brazil's TNE (TNE)--are appealing. Rising disposable incomes make Brazil's biggest brewer, Ambev, attractive. And cement giant Cemex (CX) is a good play on Mexico's strong home-improvement market. The upshot: There are lots of well-run, undervalued Latin companies. But to profit from them, investors will have to be patient.

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