Is Investment in Latin America Still Compelling?

When Mexico’s Bolsa stock index soared nearly 5% on Monday in a seemingly euphoric reaction to the government’s latest souped-up economic-recovery plan, some American investors may have wondered what the buyers knew that others didn’t.

Perhaps not much. By Tuesday’s close, the Bolsa had given back nearly half of Monday’s gain. And many analysts were soberly reminding their clients Tuesday that little will change very quickly for long-suffering Mexico: The economy still is shrinking, short-term interest rates still are above 40% and the peso remains extremely fragile.

Indeed, anyone concerned that the boat (i.e., opportunity in Mexico) has left the dock need only glance at the prices of major Mexican stocks traded on the New York Stock Exchange.

Phone monopoly Telmex, for example, closed at $27.50 on Tuesday, down 64% from its 1994 record high and off 34% from this year’s high. More important, Telmex’s NYSE shares are up just 20% from this year’s low of $23, even though the Bolsa index, at 2,302.01 points on Tuesday, has zoomed 59% from its 1995 low.

The reason for that huge disparity in 1995 performance, of course, is that prices of U.S.-traded Mexican shares reflect the double-whammy of the peso’s 50% devaluation and the recession’s effects. The point is, Mexican stock prices may have bottomed, but they have a long way to rebound before many Americans who bought in 1993 or 1994 just break even.

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Mexico’s continuing economic and market torment, which stole headlines again last week as the peso and stock prices plunged anew, is raising a painful question for Wall Street: Is Mexico--and perhaps much of Latin America--simply so far behind in economic development that the case for investing there long-term is no longer compelling?

Investment decisions, after all, aren’t made in a vacuum. Mexico, Argentina and to a lesser extent Brazil still are struggling to get their economies in order and stabilize their currencies since Mexico’s surprise devaluation last December devastated Latin America. Meanwhile, many other developing countries, from Southeast Asia to Eastern Europe to the Middle East, are moving ahead economically and are aggressively competing for global capital. So too are the United States and Western Europe.

More than a few managers of international stock mutual funds, who can invest anywhere in the world, admit they aren’t drawn to Latin American markets despite what may appear to be bargain stock prices. The Lexington Worldwide Emerging Markets fund, for example, would have 25% of its assets in Latin American stocks if manager Richard T. Saler wanted to merely match the capitalization weighting of those markets in the emerging-markets universe as a whole. Instead, Saler has only 17% of the fund’s assets in Latin American shares.

The Warburg Pincus International Equity fund owns just one Mexican stock and no Brazilian shares, says Warburg Senior Vice President Harry Ehrlich. And A. Dale Griffin, co-manager of the AIM International Equity fund, says he sold his holdings in Telmex and Grupo Televisa (the Mexican television giant) a year ago and still hasn’t felt a need to buy them back.

The big issue, these investors say, is the risk they perceive in Latin America versus the potential reward, compared to what they can find in stocks of other regions. Although there is no doubt that Latin governments are trying to deal with their high debt levels, low savings rates, high unemployment rates and heavy dependence on foreign capital, the problem now is time.

“The solutions are going to take a long time” to be reflected in economic progress, says Saler. And that gives high-saving Southeast Asian countries, in particular, a chance to extend their lead in the global growth and investment sweepstakes.

Remember: You can be exceedingly bullish about the world’s economic prospects between now and the end of the century, but nowhere is it written that the winnings must be evenly distributed among competitors. This is a game that some countries will win, and others will lose, at least relatively speaking. In Latin America Chile is an economic success, but it is the exception.

Still, some veteran money managers say the ongoing negativism toward Latin American stocks should stir the interest of contrarians who know the herd view is often wrong. John Hickling, manager of the Fidelity Overseas stock fund, was smart enough to sell most of his Latin stocks before Mexico’s crash a year ago. Now, he’s mulling buying again. “Do I want to buy these things when everyone loves them or when everyone hates them?” he asks rhetorically. “These are very, very low-expectation markets now.”

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Collapsible Shares

Mexican stocks traded in the U.S. market have fallen as much as 90% from their 1994 peaks, pummeled by the country’s deep recession and the peso’s plunge. A sampling: *--*

1994 1995 Tues. Stock high high close Coca-Cola Femsa $38.38 $27.38 $18.00 Empresas ICA 34.50 15.75 9.50 Grupo Elektra 21.75 14.38 7.88 Grupo Serfin 37.25 8.38 3.88 Grupo Simec 33.75 15.38 6.50 Grupo Televisa 73.75 32.38 17.25 Mexico Fund 40.38 23.25 12.25 Telmex 76.13 41.50 27.50 Trans Maritima 12.00 9.63 7.13 Vitro 23.13 14.00 6.50

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All stocks trade on NYSE.