Passports To A Global Portfolio: Latin America



Approval of the North American Free Trade Agreement is giving Latin American stock markets a much needed lift. Since Nov. 17, when NAFTA was O.K.'d by the U.S. Congress, Baring Securities Ltd.'s Latin American equities index has gone up 5%. NAFTA's main beneficiary has been Mexico City's Bolsa de Valores, which has jumped 12% amid hopes that the country will pull out of its slump as foreign investment pours in.

But despite the euphoria over the trade deal, analysts warn against expecting Latin America's stock markets to show anything like the triple-digit returns some have recorded in recent years. With political tensions on the rise in some countries and with many Latin companies facing more restructuring if they are to prosper in open-market competition, slower growth for equities is more likely to be the order of the day.

Still, that hardly means that Latin markets are unworthy of investors' attention. Hefty investment in infrastructure will continue to buoy many companies for years. Consider Mexico. Plans to privatize ports and expand highways, generating plants, and industrial parks should pump up profits at such cement, engineering, and construction companies as Cemex, Industrias Tribasa, and ICA, whose American depositary receipts are trading at 27, around 12 times earnings. Across Latin America, newly privatized telecommunications companies, such as Tel fonos de M xico and Chile's CTC also have years of earnings growth ahead. And many consumer stocks look promising. Salomon Brothers Inc. strategist Alfredo Villegas, for example, likes Terrabusi, an Argentine snack-food maker. "When people make more money, they eat more crackers and cookies," he says. "It's as simple as that." He also favors Brazilian brewer Brahma, which has been nearly unaffected by Brazil's 36%-a-month inflation rate.

POLITICAL SETBACKS. Not every Brazilian company has coped so handily with rising prices, however. Indeed, high inflation is only one reason why Brazil could be a trap for the unwary. Although the S o Paulo market was up 100% in dollar terms in 1993, a series of political-corruption scandals and the reemergence of labor leader Lu s In cio "Lula" da Silva as a presidential candidate has many business leaders shuddering.

Political tensions could threaten other markets as well. Venezuelan voters' decision to restore populist Rafael Caldera is raising fears that the pro-market reforms instituted by former President Carlos Andr s P rez will be reversed. And in Mexico, which holds its presidential election in August, the ruling Institutional Revolutionary Party (PRI) may face its most serious challenge in 64 years. Although the PRI should still win, opposition questioning of the party's free-market economic model could scare some traders away.

Amid such concerns, analysts say Latin investors may have to moderate their expectations for 1994. But that could still mean double-digit returns--a good sight better than many, if not most, of the world's other markets.

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