Falling commodities prices and fears that the U.S. Federal Reserve will exit its quantitative easing too soon — and too quickly — have sent global investors scrambling for safe havens. Since late May they have been pulling out of emerging economies and flocking to developed markets, U.S. equities in particular. In Latin America the rout has exacerbated volatility as some countries also cope with rising inflation and slowing economic growth, among other challenges.
In July the International Monetary Fund lowered its real gross domestic product growth forecasts for Latin America and the Caribbean from 3.4 percent to 3 percent for this year and from 3.9 percent to 3.4 percent in 2014. The Washington-based international economic and trade association also slashed its estimates for the region’s two largest economies. It cut its 2013 GDP projection for Brazil from 3 percent to 2.5 percent and for Mexico from 3.4 percent to 2.9 percent.
“It’s been a rough ride for Latin America in general this year,” affirms Rodrigo Góes, head of equity research, sales and trading at BTG Pactual in São Paulo. “It has been driven by two factors. One is the normalization of interest rates in the U.S. — a sooner-than-expected tapering by the Fed, which has encouraged outflows of capital from emerging markets and has been detrimental to the performance of our markets. In addition, the slowdown of the Chinese economy has caused commodities prices to drop. As a result, the macroeconomic fundamentals have deteriorated for some economies more than others, but all of them have suffered.”
Carlos Constantini, head of research at Itaú BBA, agrees. “Latin America is relatively out of favor in the short term,” says Constantini, who is headquartered in São Paulo. “Although this may quickly change, I think it will take some time until we see appetite for high-risk stories again.”
When that hunger returns, money managers will look to the sell side for guidance on which investments are most palatable. No firm serves up better research than Itaú, which rockets from fifth place all the way to first on the 2013 Latin America Research Team, Institutional Investor’s 21st annual ranking of the region’s leading sell-side analysts. The firm’s team position total surges by 50 percent, from 16 to 24. Put another way, Itaú teams fail to rank in only one of the survey’s 25 categories: North Andean Countries.
Bank of America Merrill Lynch holds steady in the No. 2 spot despite enjoying strong gains of its own: It captures five more positions this year, for a total of 23. The only sectors in which this firm’s crews don’t rank are Financials/Nonbanks and Health Care.
BTG Pactual, which last year vaulted from No. 6 to No. 1, tumbles to share third place with J.P. Morgan. Their 21-position totals reflect a loss of one spot for the former and a gain of four for the latter. Rounding out the top five is Morgan Stanley, which slips from a tie for No. 3 (with J.P. Morgan) after losing one position, leaving it with 16.
These results reflect the opinions of more than 810 investment professionals at some 420 buy-side institutions that collectively manage more than $418 billion in Latin American equities and nearly $265 billion in Latin American debt.
The region still offers plenty of promise, analysts and research directors say, but portfolio managers must be selective; these are markets for stock pickers. “Investors will continue to pay up for quality — for countries where reforms are being made, such as Mexico; for sectors where earnings are more reliable; and for companies with good track records of execution and corporate governance,” says Constantini, who leads the teams that capture first place for coverage of Brazil and second place in Equity Strategy.
