Latin American Markets

Latin America is widely regarded as a growth play in the equity markets. The explanation for this view is that the region is a commodity producer -- agricultural goods in Brazil and Argentina, metals in Brazil, Chile and Peru, oil in Venezuela and Ecuador, natural gas in Bolivia, etc. Commodity stocks are highly cyclical and very dependent on international economic activity, thus it seems that it is not the right time for commodity exposure. However there are other things to be considered.

In the past few years, the correlation between growth and commodity prices has increased since the main source of growth was the emerging economies, in which economic growth is more intensive in the use of commodities.

For the future, we expect this correlation to increase even more, as emerging economies will keep on leading the growth and developed economies, particularly the U.S. will rely a lot on government investments in infrastructure. It seems that the scenario is not bad for basic material producers -- it is undeniable that economic growth in the near future will be very commodity-intensive. However, the basic question remains: Will there be any economic growth?

We believe it is too early to answer this question. We remain quite skeptical on commodity producers for now; nevertheless there are other opportunities in companies that are focused in local markets in Latin America that are quite interesting.

We believe emerging economies will outperform more developed countries in Europe, the U.S. and Japan. In fact, most emerging countries have high levels of reserves, a more solid banking system and a growing consumption. In one particular case in Latin America, it is interesting to understand the situation of Brazil, the biggest economy in the region. Brazil has over US$200 billion in international reserves, a positive trade balance, a solid fiscal position, a healthy banking system and very high interest rates that will be reduced in the short-term to keep the economy growing.

Brazil still has the highest real interest rate in the world. Domestic rates are now at 12.75% (after the Central Bank slashed rates by 100 bps in January 2009) and 2009 inflation is expected to be 4.5%. The lower volatility of the Brazilian real will enable the Brazilian Central Bank to go on reducing interest rates in the very short-term. We expect Brazilian rates to reach 10% per year by the end of 2009.

Since the local banking system remains solid, lower rates are not transformed into a liquidity trap. Amazingly, the Brazilian economy has even showed some signs of recovery in January and February 2009.

After 5 months of consecutive declines, in January Brazil produced a total of 186,100 vehicles, almost 100% more than in December 2008. Total vehicle sales in January reached 194,500 vehicles, 1.5% more than in December 2008. Some days ago, it was announced that car sales in Brazil increase 15.56% in the first half of February 2009 if compared to the first half of January 2009, reaching a total of 109.258 units (just cars, not including buses or trucks). If we compare to the same period 2008 it also increased by 7.4%.

It was also announced some days ago that in January 2009, total subscribers in the Brazilian wireless market grew by 0.86% from December 2008. Despite the crisis, January 2009 was the second best month in terms of subscribers' growth in 10 years, in absolute terms!

It seems that companies focused in local Latin American markets will go through the crisis without much pain; thus, there are some good opportunities out there:

OPPORTUNITIES

In such a business environment we would recommend some Brazilian domestic focused companies like the telecom companies Vivo (VIV - Snapshot Report) and Oi Participacoes (TNE - Analyst Report), consumption products producer like AmBev (ABV - Analyst Report), fuel retailers like Grupo Ultra (UGP - Analyst Report), high-dividend utilities like Telesp (TSP - Snapshot Report) and clear bargains like Telemig (TMB).

WEAKNESSES

On the other side, we would avoid some companies that are still facing seemingly endless problems with currency derivatives like Aracruz Celulose SA (ARA - Analyst Report) and Votorantim Celulose e Papel SA (VCP), highly levergaed raw material producers exposed to the U.S. market like Gerdau (GGB - Analyst Report) and Cemex SAB de CV (CX - Analyst Report).