Latin Stocks Are Catching Eye of Global Investors
Latin American stocks have jumped to the top of many global investors’ “gotta-own” lists in recent weeks, fueled by talk of an economic renaissance for the region in the 1990s.
The Bolsa index of 39 key stocks on the Mexican Stock Exchange is up 28% since Jan. 1, on top of a 50% surge last year. The index closed at a record 802,664 on Tuesday, up 4,384 points for the day.
Stocks in Brazil, Chile and Argentina also have gained sharply. And that is driving the share prices of the U.S.-based investment funds that specialize in Latin American stocks.
The stock price of the Emerging Mexico Fund, for example, has jumped to $11.875 from $9.125 at the end of 1990, for a 30% rise. The Brazil Fund is up 49%, and the Chile Fund is up 31%. In contrast, the Dow Jones industrial average is up 11% this year.
The funds, all of which trade on the New York Stock Exchange, are the easiest vehicles for U.S. investors who want to own a piece of Latin American markets. While in some of those markets a U.S. investor could try to buy shares directly, the cost and hassle make it prohibitive. (And only one Mexican stock is heavily traded on a U.S. market: Telefonos de Mexico, the phone company, which currently trades for $2.56 a share on the NASDAQ market, up 58% so far this year.)
Besides, the emerging Latin American markets have to be seen for what they are--they’re still very small and highly speculative. The market capitalization of the Mexican exchange is only about $50 billion, compared to $3.5 trillion for the U.S. market. If you want to own Mexican or South American stocks in the ‘90s, you’re far better off in a diversified “country fund” portfolio.
Why the burgeoning interest in those markets of late? Many global investors see Latin America entering a new era of growth. The crushing foreign debt that dragged down most of Latin America in the 1980s isn’t gone, but for many of the countries it has become more manageable. Now, the region’s great hope lies in free-market economic policies aimed at curbing wild inflation and putting capital to its most productive use.
Chile has already scored major successes with economic reforms. Mexico also has won global praise for its plan to privatize many state-run businesses and for bringing inflation down to 30% last year. The goal this year: under 20%.
Perhaps most intriguing for investors, President Bush has proposed a North American free-trade pact to encompass the United States, Canada and Mexico. That has helped push a wave of new foreign money into Mexican stocks this year because investors believe that Mexican companies--with their cheap labor--would benefit dramatically from the elimination of tariffs and other anti-competitive measures.
Such a pact may be tough to achieve, of course; many U.S. companies will oppose it on the grounds that they can’t compete with lower-cost Mexican firms. Still, in many ways Mexico already is in the driver’s seat.
“A lot of the work of free trade already has been done, without the signing of any treaties,” says Timothy Heyman, the Mexico City-based director of Baring Research, one of Britain’s largest securities firms. He points to the heavy investment in Mexico by many large U.S. multinational companies during the 1980s.
Long-term investors in Mexican stocks also believe that, even if the hoped-for economic boom doesn’t come as fast as expected, the stocks still are too cheap too pass up now. Jorge Herrera, an officer of the Mexico Equity and Income Fund in New York, says the average Mexican stock trades for 11 times 1990 earnings per share, versus a price-to-earnings ratio of 17 for the Dow industrials.
What’s more, if you buy one of the three Mexican country funds, you’re getting assets at a discount. The Mexico Equity and Income Fund’s share price, for example, now is $10.25. But the value of the investments in the fund, or the “net asset value,” is $12.125 a share. So the stock sells for a 15% discount to the real value of the fund.
That discount isn’t unusual among country funds. It partly reflects investors’ fear that there is too much hot air in Mexican stock prices. Still, a discount is a discount. Where else can you pay 85 cents for assets worth $1?
Michael Porter, a Smith Barney, Harris Upham & Co. expert on country investment funds, believes that all three Mexican funds offer healthy potential for long-term investors. But he notes that the discount on the Mexico Fund--the first such fund, created in 1981--is much smaller than on the younger Emerging Mexico or Mexico Equity and Income funds. The $330-million Mexico Fund, which owns about 50 major Mexican stocks, is “the brand-name,” the one most investors think of first, Porter says. But that may mean better opportunities exist in the newer, lesser-known funds, he says.
If you want to make a broad bet on the region, the Latin America Investment Fund is a good choice, says Douglas Dent, executive editor of the Closed End Fund Digest newsletter in Santa Barbara. The Latin America fund currently has 35% of its assets in Mexico, 18% in Chile, 7% in Brazil, 6% in Venezuela and 4% in Argentina. “You get the whole region,” Dent says.
Briefly: Another sign of the Mexican market’s coming-of-age: Short selling becomes legal there in April for the first time, at least for a list of 20 stocks to be approved by the government . . . Peter Eliades, who has published the Stockmarket Cycles newsletter from Los Angeles for the past 15 years, is moving to Santa Rosa, north of San Francisco. He’s making the change for the sake of his 1 1/2-year-old daughter, he tells subscribers.
INVESTING IN LATIN AMERICA The easiest way to buy a piece of Latin American stock markets is also just about the only way: closed-end “country” funds that trade on the New York Stock Exchange. A look at the funds and their stock prices compared to their “net asset values,” which is the per-share value of their underlying investment holdings:
52-week Tues. Stock vs. Fund high/low close NAV* NAV Brazil Fund 12 3/8-6 3/8 9 7/8 9 3/8 +5% Chile Fund 20 7/8-11 20 1/4 23 1/8 -12% Emerging Mexico 12-8 3/4 11 7/8 13 3/8 -11% Latin American Fund 14 3/4-9 1/8 14 1/4 16 3/4 -15% Mexico Equity and Income Fund 11 7/8-8 1/8 10 1/4 12 1/8 -15% Mexico Fund 17 1/4-11 16 3/4 17 7/8 -6%
*NAV, or net asset value, rounded to nearest eighth of a dollar, as of March 22.
