`Buy the Correction' in Latin American Stocks, JPMorgan Chase Recommends
Latin American stocks, led by raw- materials producers and homebuilders, are poised for a rebound after falling as much as 21 percent on concern the global economic recovery is faltering, JPMorgan Chase & Co. said.
Based on fifteen regional “corrections” of more than 20 percent over the past two decades, buying Latin American equities at this point of the selloff may generate a 12-month return of 27 percent, strategist Ben Laidler wrote.
“It pays to buy the correction,” New York-based Laidler wrote in a note to clients dated May 21. “Investors should be positioning for a rebound as European contagion gradually subsides on EU stabilization plan implementation.”
“Clobbered” stocks including state oil company Petroleo Brasileiro SA, copper producer Grupo Mexico SAB and homebuilders Gafisa SA and PDG Realty SA Empreendimentos & Participacoes are set to lead gains, according to Laidler. Government-run lender Banco do Brasil SA and utility Centrais Eletricas Brasileiras SA are also poised to rebound, he said.
The correction won’t become a “crash,” defined as a drop of more than 50 percent, according to Laidler. There have been four crashes since 1987, he said.
“Global fundamentals are significantly better than 2008,” Laidler wrote. “Regional valuations are attractive.”
The MSCI Latin America Index rebounded May 21 after entering a bear market, extending its drop from an April 14 high to 21 percent through May 20.
Brazilian stocks are “very compelling” after companies in the benchmark Bovespa index reported better-than-expected first- quarter earnings, offsetting a decline in share prices, Banco BTG Pactual SA said.
“When global markets stabilize, foreign investors will be attracted by Brazil’s compelling valuations, driving the market back up,” BTG Pactual strategists Carlos Sequeira and Antonio Junqueira wrote in a note to clients today.
Companies that account for 48 percent of the Bovespa by index weighting reported higher-than-forecast profit, helped by financial institutions and state oil company Petrobras, while 23 percent missed estimates, the analysts said.
The measure has been sent “plummeting” because of Europe’s debt crisis, U.S. banking reforms and concerns China will take further steps to cool growth, according to BTG Pactual. The index is now trading at a “very compelling valuation” of 9.8 times estimated earnings over the next four quarters, the Rio de Janeiro-based analysts wrote. While that’s in line with the gauge’s six-year average, it is lower than the “pre-crisis peak” of 16 times, they said.
BTG Pactual’s current forecast of 6 percent economic growth in 2010 “now looks conservative,” the analysts said. The bank forecasts Brazilian firms’ earnings will grow 37 percent this year.
“The fundamentals of the Brazilian economy are as solid as ever,” Sequeira and Junqueira wrote. “Companies’ recent results confirm the positive economic outlook.”
Brazil’s economic “improvement” will spur the country’s financial stocks to recover from the selloff, Barclays Plc said.
“Fear and uncertainty may drive the market in the short term,” the analysts wrote. “Some investors will take this opportunity to unwind investments in some asset classes in order to re-allocate their positions, thus participating in a market recovery from an eight-month low.”
Investors should buy companies including Itausa - Investimentos Itau SA, the owner of Latin America’s largest bank by market value, and exchange-operator BM&FBovespa SA, analysts including Roberto Attuch wrote in a note to clients today.
Brazilian banks, which are trading at “more attractive” valuations than their Latin American peers, will see “robust growth and quality earnings,” according to Barclays.
The Bovespa dropped to 58,192.08 last week, the lowest closing value since September.