UK banking and consumer goods companies exposed to the faltering Latin America market have held up w...
UK banking and consumer goods companies exposed to the faltering Latin America market have held up well despite the uncertainty their exposure has created, according to Henderson Global Investors.
Richard Prew, director of UK retail funds at Hendersons, says UK companies with direct exposure to Latin America have caused concern about the translation effect of weaker Latin American currencies compared with sterling.
Another short-term concern is how the currency weakness may slow economic growth, which in turn may lead to bad debts and weaker profits.
Robert Buckland, UK strategist at SchroderSalomonSmithBarney, says investors have been buying stocks such as BAT, Unilever and Diageo for their defensive industry characteristic but they have missed the fact that these companies have higher geographical risk profiles.
Buckland says: 'In particular, we would highlight BAT, Unilever and Reckitt Beckiser, which are the most exposed to the Brazilian economy. Brazil is most at risk to problems in Argentina. Elsewhere, we can also see some exposure in the traditional industrial stocks and overseas banks. ICI has a significant paints business in Brazil, while HSBC and Lloyds TSB have loan exposure to both Argentina and Brazil.'
However, Trevor Green, UK fund manager at Credit Suisse Asset Management, says UK exposure to Latin America is small and few companies have more than 5% sales exposure to the region. Green says: 'The real issue is whether the problems in Argentina spread to the rest of the world.
'Events in Latin America do not have a material impact on UK stocks. The concern is that the weak economic state of the region will lead to a slowdown in UK products and therefore there will be profit downgrades. However, North America is more of a main concern for these firms.'
Prew says the market has been concerned about this for the past two months and is now looking ahead to see if any UK companies have been affected. He says: 'Consumer goods prices have so far not been affected. This is because it is generally a defensive area and Latin America only accounts for a low proportion of sales. Results from HSBC also show it has coped well so far, with bad debts not as high as the market originally expected.'
Prew highlights that a positive factor for investing in Latin America is that its growth rates are higher than other regions, but he notes this is offset in the short term by a less stable economic and political environment, which affects short-term growth. He says: 'Latin America is just a small part of UK companies' business and losses can be made up elsewhere in Europe and the US.'
Jonathan Asante, head of emerging markets at Framlington, says the risk premium attached to companies will lower as soon as Argentina defaults.
He says: 'It is a double-edged sword. Once Argentina defaults, the event will have happened, so people can start looking forward. The Argentina default has already been 70% to 80% priced into local markets. While it may have slightly further to fall, Argentina is now getting close to defaulting.'
• Banking/consumer sectors coping well.
• Long-term growth rates remain positive.
• Companies await Argentina default.
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