We are extremely bullish about the prospects for Latin American equities over both the next 12 month...
We are extremely bullish about the prospects for Latin American equities over both the next 12 months and longer term. Most Latin American economies are implementing secular changes such as privatisation and deregulation which embrace capitalism and make these economies more globally competitive. This presents investors with the potential to make very attractive absolute returns across the region's stock markets.
The region has historically suffered from boom and bust cycles which are superimposed on top of this positive long-term secular change. The best time to buy the region is in the aftermath of a recession, and just before the next boom. We believe that time is now.
We estimate that the region's GDP will fall by 0.5% in 1999 but should rebound and register 3%-4% growth in 2000. The convergence of growth in the US, EU and Japan next year is driving up the price of commodities and reducing the risk premium assigned to emerging market debt, helping to lower both interest rates and current account deficits across Latin America, which in turn nurtures growth. The combination of falling interest rates and accelerating economic growth should provide fundamental support for a substantial rally in Latin American equity markets in 2000.
The Brazilian government has successfully stabilised the economy and inflation should end the year in single digits. Brazil now has an extremely competitive currency, which should help it grow exports in 2000. It also has a series of world class corporations and is acknowledged as a world leader in a series of commodity-based industries such as steel and paper. Improving export performance should be the icing on the cake for a recovery in the domestic economy. Falling local interest rates should stimulate consumption and investment growth.
The Brazilian market is currently trading on a price-to-earnings multiple of 8x forecast 2000 earnings, which is less than half the multiple given to any western stock market. We are forecasting 30% dollar earnings growth in Brazil next year, which is much faster than any G7 stock market. The combination of very low valuations, strong earnings growth and falling interest rates all lead us to predict a very powerful bull market in Brazil next year.
With 40% of the regional benchmark, Mexico also makes an extremely positive story. Mexico is converging with the US, and Mexico's much cheaper manufacturing costs is driving US investment there. The integration of NAFTA is still at a very early stage, and Mexican exports only represent 1.1% of US GDP, but 25% of Mexico's GDP. Growth in Mexico - US trade is consequently a very important secular driver in Mexico's overall GDP growth. Export growth in the economy has been the main driver of Mexican GDP growth since the 1995 Tequila crisis. We believe that the domestic Mexican economy has now sufficiently reconfigured itself to return to growth.
A rise in domestic consumption and recovery in the domestic banking system should allow Mexico GDP growth to accelerate to 5% annually despite a moderate slow down in the US. Mexico is very likely to achieve investment grade status at some point over the next three years, which is likely significantly to drive down real interest rates from their current 8-9% level. The main domestic risk in Mexico is the presidential elections due in July 2000 which might lead to an increase in volatility in the market. We forecast that the Mexican stock market is trading on 14 times 2000 earnings and should deliver a 17% dollar earnings growth in 2000.
Rupert Brandt is fund manager at Foreign & Colonial Emerging Markets
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