Standard & Poor's latest review of the latin american sector predicts the future is bright for this emerging market region
Latin America was one of the best performing regions in the year to 1 April 2005, and fund managers are optimistic that the year ahead will also be good, says Standard & Poor's (S&P) in its latest review of the sector published today.
The review covers seven funds; one achieved an AAA-rating, three attained AA-ratings and two were A-rated. One fund was 'Under Review' following changes in the team.
Fund managers saw the ongoing US monetary tightening cycle, traditionally a bad sign for leveraged regions such as Latin America, as the main risk in the year ahead. However, they were optimistic overall, predicting that rates would remain below levels that would result in imminent pressure on Latin America. Most believed that improved fundamentals and lower debt levels had reduced the region's vulnerability relative to previous cycles.
In a year when basic resources stocks were must-haves, and technology and healthcare were the laggards, Latin America was one of the world's best- performing sectors. The S&P/ IFCI Latin America index had, at 1 April 2005, more than a quarter of its weight in basic resources stocks, and zero weightings in technology and healthcare.
The average Latin American equity fund returned more than 30% over the annual review period, significantly ahead of other regional funds, except for funds invested in Africa or the Middle East, which had broadly similar returns. As in 2003, industry rather than country positioning was the primary driver of returns for Latin America fund managers. Holding the region's steel and energy stocks was vital. An overweight in banks was also helpful.
Identifying these positive trends was generally sufficient to achieve outperformance. However, following the broad-based rally of 2003, effective stockpicking was back as a critical tool for success in 2004.
This was best illustrated in the telecoms and consumer sectors, both large proportions of the index. Holding Brazilian telecoms, Mexico's Telmex, or blue-chip consumer stocks such as Wal-Mart de Mexico, Grupo Modelo or Femsa, for example, would have detracted from performance. Holding America Movil, or small-cap emerging food stocks (for example, Perdigao, Gruma, Grupo Bimbo), on the other hand, would have added significant value.
Of the seven funds currently rated by S&P in the Latin America sector, all outperformed the peer group median in 2004. All were overweight steel and bank stocks to some extent, driven in part by top-down signals such as the shortage of steel supply and falling interest rates.
Despite the rally being driven by deep cyclicals and banks, momentum-friendly or growth-oriented managers did not appear to have a style advantage over their value-focused peers. As in 2003, the major style effect of 2004 was capitalisation-related. The more funds were willing to go down the cap scale in search of less well-researched stock opportunities, the more they benefited from the 'smaller is better' trend that continued to characterise global equities markets in 2004.
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