The markets of Brazil and Argentina should rally out of their doldrums, some think, and post notable performances for the year.
Stefano Natella, head of Latin America equity research for CS First Boston Corp., believes Brazil's market has the potential to advance 50% this year, while Argentina's could climb 25% to 30%.
According to the International Finance Corp.'s Investible Price Index, Argentina's market fell 3% in dollar terms this year through Feb. 3. Brazil's market dropped 8.8% for the period.
Given its outlook, CS First Boston is recommending an overweighted position (47%) in Brazil and (10.4%) Argentina in Latin American portfolios. In turn, it suggests a neutral (12.6%) position in Chile, an underweight (20%) in Mexico and a next-to-nothing (0.2%) exposure in Venezuela.
First Boston analysts believe lower interest rates in the United States will rekindle interest in Argentina and Brazil.
According to Mr. Natella, the Federal Reserve is likely to hike short-term U.S. rates again between March and April, after which rates would drift higher until about mid-year. But once the peak is perceived, investors would feel more comfortable returning to Brazil and Argentina, where the fundamental economic factors remain attractive.
Mexico, on the other hand, has heavier baggage weighting it down. Apart from general investor disillusionment after the recent peso crisis, analysts say Mexico suffers from: a bearish corporate earnings outlook; political problems, including those in Chiapas, that remain unsolved; and high interest rates that are deterring investors from the stock market.
In Brazil, 1994's raft of good news - including economically favorable election results and a new inflation-crushing program - will help bring better results in 1995. For example, First Boston officials forecast the gross domestic product will grow 5%, compared with 4.9% last year. In 1996, the GDP should advance 6%. Already enjoying a strong trade surplus ($10 billion in 1994), Brazil's capabilities should only be strengthened by January's debut of Mercosur, the trade agreement among Argentina, Brazil, Paraguay and Uruguay.
Political and legal developments also appear positive. First Boston's first-quarter Latin American Equity Strategy report says Brazil's President Fernando Henrique Cardoso "will push ahead a tight agenda of constitutional amendments" that are expected to be presented to the new congress Feb. 16.
Key aspects of the constitutional changes are: breaking up monopolies, which would likely entail more privatizations or the selling of stakes in the mining, telecommunications and electric utilities areas; reforming the social security system; and undertaking tax reform. The three planks would add up to a more open economy and a better fiscal system, said Suhas Ketkar, a director of CS First Boston.
The Argentine economy will slow to a about 4% growth this year from an average of 7.3% over the past four years, First Boston analysts report.
Even so, First Boston sees an earnings growth of more than 15% to 20% for "investment-led companies (in telecommunications, oil, and electrical utilities), those with foreign subsidiaries in growth markets," such as beverage company BAESA, "and exporters."
Although a presidential election is coming in May, political risk is also seen as minimal, since the incumbent, President Carlos Saul Menem, is expected to win. First Boston also rules out the possibility of a currency devaluation in Argentina.
According to the First Boston report, at a price/earnings ratio "of just 11.6 times 1995 bottom-up earnings, vs. estimated 19% long-term earnings growth, the valuation/growth profile of the stock market remains the most attractive in the region."
London-based Baring Securities isn't as enthused.
In a recent report, Baring officials said although they are "cautiously optimistic about Argentina's ability to get through this (current) unsettled period, (they) cannot recommend more than an underweighted allocation of 8%." Some of the underlying considerations: GDP growth has been downgraded to 3%, from 4.5%; consumption is seen dropping to 0.6% from 2.3% previously; and investment should slide to 10% from 15%.
Nonetheless, Baring officials are bullish on Brazil. In Latin American portfolios, it recommends giving Brazil a "slight overweighting" of 42%.
Baring also recommends exposures (all overweightings) of 15% in Chile, 5% in Colombia and 6% in Peru. But Mexico is underweighted with a recommended 20% exposure.