Latin America: Don't Leave This Party Yet

With Latin American stock markets surging, it might seem like just the time to cash out of the crisis-prone region -- before it's too late. After all, Brazil's bolsa has soared 58.1% so far this year, and Mexico's has gained a solid 16.1% in dollar terms. Even markets in volatile Venezuela and Argentina are more than 50% higher. And this is one of those rare moments that none of the major economies in the region is in dire straits.

Prudent investors may want to take money off the table, but experts say there's still plenty of upside in Latin markets. The region is on the cusp of an economic recovery, and its markets should get a boost from strong global liquidity. "The right conditions are in place to see a further 10% to 15% rise in Latin America before the end of the year," says Geoffrey Dennis, Latin America equity strategist for Smith Barney in New York.

Brazil, South America's biggest economy, is the top pick. Fans of the country's stocks point out that Brazil's high benchmark interest rate, which has controlled inflation but kept consumers at home, has fallen from 26.5% to 22% this year. On Aug. 20, the central bank cut that rate 250 basis points, an aggressive move aimed at jolting the economy. Ricardo Amorim, head of Latin America research for IDEAglobal in New York, projects that rates will sink to 15% by yearend 2004. Meanwhile, President Luiz Inácio Lula da Silva is sticking with his plans to reform the country's inefficient social security and tax systems. Gross domestic product was stagnant the first half of 2003 but is expected to finish the year 1.4% higher and then rise 3.2% in 2004.

Despite the recent runup in Brazilian stocks, some of the country's best companies remain cheap by international standards. Oil producer Petrobrás, at 4.2 times projected 2003 earnings, is a bargain, says Damian Fraser, head of Latin American equity research and strategy for UBS Securities in Mexico City. Investors also like Brazil's top-notch commodity exporters, including steelmaker Companhia Siderúrgica Nacional, or CSN; iron ore giant Companhia Vale do Rio Doce; and pulp producers Aracruz and Votorantim Celulose e Papel. CSN, self-sufficient in energy and among the world's lowest-cost major steel producers, "is one of the greatest stories around," says São Paulo-based Marcelo Kayath, head of Latin American research for Credit Suisse First Boston.

Another regional favorite is Mexico, a likely candidate to become Latin America's star performer in 2004. Its economy, which is closely tied to the U.S., is expected to grow 1.6% in 2003 and 3% next year. First on many investors' list of picks is cement maker Cemex, whose operations in the U.S., Europe, South America, and Asia make it "as much a play on other countries as it is on Mexico," says Smith Barney's Dennis. Then there's cellular-phone operator América Móvil, which will benefit from increased phone usage as the region's economy improves. Grupo Modelo, the maker of Corona beer, is another strong choice because of its brisk exports to north of the border. And CSFB's Kayath likes Spanish-controlled bank Grupo Financiero BBVA Bancomer, which stands to gain from any expansion of credit in Mexico.

Beyond Brazil and Mexico, the pickings are slim. The economies of Argentina, Chile, Peru, and Venezuela could all grow more than 3% in 2004. But those countries' markets are shallow. Latin America-dedicated mutual funds typically put about 90% of their holdings into Brazil and Mexico. A rise in copper prices might attract investors to Chilean mining companies, but endemic political instability will keep all but intrepid investors out of Venezuela and Argentina.

Wherever one invests, Latin America is littered with potential mine fields due to poor corporate governance and high debt loads. And if the U.S. and European economies stall, all bets are off. But investors willing to swallow some risk may find that Latin America can offer a piquant payoff.

By Ian Katz in Miami

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