Latin American equity markets defied the worldwide economic downturn for nearly a year before falling victim to it in the spring of 2008, when jittery investors began yanking their money out of stocks in search of safer havens. Now, thanks to aggressive economic stimulus initiatives by local governments, those same markets are well on their way to recovering last year’s catastrophic losses.
MSCI’s benchmark emerging-markets Latin America index ended July at 3,232.31, having soared nearly 95 percent (in dollar terms) since bottoming out in November, and many economists and equity strategists believe that the best is yet to come. “As investors’ risk aversion subsides and economic growth returns, the markets will continue to rise,” predicts Cristián Moreno, New York–based head of Latin America equity research at Santander.
Ben Laidler, J.P. Morgan’s head of Latin American equity research in New York, notes a key difference between the financial crisis in the U.S. and Europe and the turmoil that sent Latin American equity markets plunging. “What is going on in the developed markets is structural, but in the emerging markets it’s cyclical, which is why the Latin American markets came back so fast,” explains Laidler.
Investors seem to understand the distinction. Over the past few months, they have been snatching up the region’s stocks, now attractively valued after a market rout that saw the MSCI index plummet 68 percent from May 2008 through mid-November. Brazil, for instance, recorded its fifth straight month of net inflows in July, according to the nation’s Bolsa de Valores, Mercadorias & Futuros Bovespa exchange (see “Brazil Returns to the Boom Times”).
To keep up with surging investor interest, many firms have been beefing up their coverage of the region. Researchers at J.P. Morgan now track 160 Latin American stocks, 25 more than last year. “This is a bigger, broader franchise today than it was 12 months ago,” says Laidler. “We have been building out in the region to get closer to companies and local clients,” he adds.
The firm’s aggressive expansion is winning praise from investors. J.P. Morgan leads the 2009 Latin America Research Team, Institutional Investor’s 17th annual ranking of the region’s top equity analysts as determined by the world’s leading money managers, vaulting all the way from fifth place. The firm captures 15 total team positions, nearly twice as many as the eight it won last year and one more than last year’s top-ranked firm, Credit Suisse, which slips to second place.
Holding steady in third place is Banc of America Securities–Merrill Lynch, with 13 positions — one more than last year. Santander and UBS Pactual tie for fourth, with 11 positions each. The Spanish bank, which was ranked No. 4 last year as well, picks up two team positions. UBS Pactual tumbles from second place, having lost six total team positions. (In April the Swiss bank announced that it would sell its Brazilian financial services operations to São Paulo–based BTG Investments; the $2.48 billion deal is expected to close later this year.)
Stephen Haggerty, who was named head of Americas equity research in March, following Bank of America Corp.’s January acquisition of Merrill Lynch & Co., points out that strong growth in the years preceding the worldwide economic crisis left local governments well positioned to respond quickly to the downturn. “We saw ample room for interest rate decreases in the first half of 2009 across Brazil and Chile, and as rates moved, performance of equity markets reflected improved fundamentals,” says Haggerty, who is based in New York. His 20 analysts follow 150 stocks.
Laidler, who leads the No. 2– ranked team in Equity Strategy, says his firm’s 23 analysts have been modifying their research to keep pace with changing investor expectations. “Last year was a big year for our strategy and economic products, and somewhat less so for individual stock research, but now that the market is coming back, it’s switching around,” he explains.
Analysts at Credit Suisse have also adjusted their approach to changing market conditions, according to Emerson Leite, the firm’s director of Latin American equity research. “Over the last 12 months, due to significant reduction in trading liquidity amid the crisis, we increased our focus on the large caps,” says Leite, who is based in São Paulo. “We now see an increased interest for small- and midcapitalization stocks, and we have one of the most broad coverages on the Street on this segment.”
Leite, who leads the second-place team in Oil, Gas & Petrochemicals and co-leads third-ranked teams in Argentina and Brazil, added two analysts to his research staff, for a total of 26; they cover 140 stocks. He plans to expand further, particularly in Chile, Colombia and Peru, and is bullish on Latin American markets. “Even with the immediate impact of the global downturn, the region was far more robust than other markets hit in its ability to cope,” he says.
Santander is home to Latin America’s largest equity research operation; its 40 analysts track 198 stocks. They, too, have modified their approach in response to worldwide economic conditions. “We moved from focusing on companies’ income statements to focusing on their balance sheets, due to the increased financial risk we saw in the context of the global financial crisis,” says Moreno. As regional stock markets are roaring back, “we are moving from a risk-aversion strategy to a recovery strategy,” he adds.
