LatinFinance - May/June 2017 - 20

"This type of performance does not
happen very often but it is happening
because Brazil is coming from very
distressed levels," she says. "We are
unlikely to see these kinds of returns going
forward, but remember Brazil is still going
through a recession."
The fund's holdings include retailer
Lojas Renner, meat exporter BRF Foods
and drugstore chain Raia Drogasil, as well
as Brazil's biggest banks.
"I still have very large positions in Itaú
and Bradesco that have been winners
throughout the downturn and have gained
market share," Wachnitz adds. "The hope
is also that they grow as the consumer
eventually recovers."
Investors that rode out the free fall in
Brazil a year ago are now enjoying the
country's improved economic prospects.
Wachnitz says March last year was the
ideal time to buy stocks in Brazil, when risk
was at its highest, the currency was cheap
and companies were on the long road to
redemption.
"The message now, however, is that
we are in the early stage of an earnings
recovery," Wachnitz adds. "There are good
companies to invest in."
Aberdeen's Latin America Equity
Fund also likes Brazil. Six of its biggest
10 holdings are in Brazil and include
mining firm Vale and real estate developer
Multiplan. Peter Taylor, Aberdeen's Latin
America fund manager, says the investor's
weighting toward Brazil is a result of a
stock-picking approach, rather than a bet
on the country's economic recovery.
"[Brazil] is the deepest market with the
best quality companies, and the Brazilian
market had a phenomenal year last year,"
he says. "People sold off plenty in [2014
and 2015], but our decision to stick with
Brazil throughout the worst of times 18
months ago was based on a bottom-up
view."
Consumer related names, such as the
country's mall operators, were among the
winners for Taylor. Shopping malls and
banks may have fallen out of favor during
Brazil's lowest point, but Taylor argues
that the sectors were resilient in 2016
and offered some of the highlights of the
portfolio.
"People assumed that banks would have
credit problems and that shopping malls
would have vacancies with the consumer
downturn," Taylor says. "In January 2016,
very few would have predicted Brazil was
going to be the market to outperform."

20 L ATINFINA NCE.COM - May/June 2017

PETER TAYLOR, ABERDEEN

"WHAT THE LAST
12 MONTHS HAVE
SHOWN IS HOW
DANGEROUS A
TOP-DOWN VIEW
CAN BE"

Mexican malaise
Mexico's stock market has had a rocky year.
A rapid slump after the US elections erased
much of the gains of previous months.
Investors are still worried about Mexico's
trade relations with the US but some are
bullish about the opportunities on offer.
"What the last 12 months have shown
is how dangerous a top-down view can
be," Taylor says. "You can add value to a
portfolio by trying to block out the noise
and focus on the individual companies."
But not everyone is so keen. Ray Zucaro,
chief investment officer at Miami-based
RVX Asset Management, a boutique
manager with $140 million in assets under
management, says stocks never "cheapened
up enough" for him to allocate more funds
to Mexico.
"You have big bellwethers like América
Móvil, and, yes, it was cheaper [after the US
election] but not enough to be interesting,"
he says, adding that cement maker Cemex
also remained expensive in his view.
Taylor calls the sell-off in the Mexican
market last year an illusion. "The Mexican
market was quite resilient in 2016," he says.
"Mexican stocks were not significantly
cheaper compared to the beginning of the
year."
However, early November, just after the
US election, offered a buying opportunity
for some. Luis Carillo, the head of Latin
American equities at JPMorgan Asset
Management, says the fund used the general
sell-off to buy a number of shares.

"We realize the risks for Mexico are high
in the short-term. We can expect volatility in
the stock market and FX," he says. "We are
very optimistic about the long-term of the
economy."
FIG in fashion
Across the region, financial institution
groups (FIG) rose to prominence as a
favorite for stock pickers.
"We are increasing in a few other sectors,
but the biggest change is less consumer and
more banks over the last year," says Carillo.
In Brazil, for example, the economic
rebound will give private sector banks the
chance to pick up market share from public
lenders, improving spreads and growing
their loan portfolio.
"The boom we've had in consumption
is going to reduce. That's why we love the
banks more. They are underearning now,"
he says.
That bet has paid off as FIG share prices
have risen, ranging from the region's biggest
banks, Itaú Unibanco and Bradesco, to
smaller lenders like Argentina's Banco
Galícia and Grupo Supervielle.
And despite having performed strongly
already, analysts believe there is more to
run. Most investors remain underweight
on Argentine FIGs, for example, although
their stock prices have risen 160% over the
last three years and outperformed the MSCI
Argentina by 54%, according to Morgan
Stanley Research.
If Argentina's stocks are reclassified by
the MSCI index as emerging markets - from
frontier status today - they could rally
further, say analysts at Morgan Stanley.
The shift from frontier is imminent, says
Kristina Garner, an equity research analyst
at Invesco. "The credit penetration is also
really low," she adds. A low rate of lending
- at 17% of GDP in Argentina, compared to
a regional average of 46% - offers growth
potential for the financial system, she says.
But great opportunities in Argentina can
be found beyond financial institutions, says
Pablo Riveroll, who manages Schroders'
Latin America International Selection
Fund, which placed ninth in the Equity
Investor Scorecard. He is also betting on the
economic change that Argentina's centerright administration is championing.
"The potential growth is huge and, as
inflation and interest rates come down,
people will invest more," he says. "The debt
levels, or access to capital markets, is just
as good as any market, so this should be a
trend we will be exposed to." LF
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