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The Case for Faith in Latin America


Collateral damage is an old concept for Latin American investors. The latest victims are the brave souls who bet on Brazilian stocks over the past year--even as Argentina continued its long march toward bond default. As Argentine officials made one misstep after another in handling the country's $132 billion debt, Brazil's market plunged with Argentina's. By yearend, Brazil's bolsa had slumped 30%, and Argentina's nearly 40%, in dollar terms.

Argentina's humiliation isn't over. But investors hate to write off Latin America and its perennially alluring growth story. Moreover, there is Mexico to consider: Its main index rose over 14% in dollar terms in 2001, making it a star among global markets. And some analysts think that Brazil will quickly snap back from the "tango effect," recovering by late 2002. "We expect to see a global economic recovery in the second half of 2002, and Latin America is geared to global growth, in part because it's a big commodity exporter," says Damian Fraser, director of Latin America research for UBS Warburg. Because of their size and liquidity, Mexico and Brazil draw about 90% of the region's foreign investment these days. Both countries have made strides in improving corporate governance and shareholder rights.

The trick for investors will be to find Latin stocks that ride the recovery. Mexican exporters should benefit, since the country sends 90% of its exports to the U.S. But most are divisions of larger conglomerates that depend on domestic sales. So analysts recommend stocks that tap rising Mexican purchasing power. Although growth was flat in 2001 and is expected to tally just 1.4% in 2001, real wages are expected to grow by as much as 6% in 2002 for the third straight year. More spending power points to such blue chips as Femsa, a M?nterrey brewer and soft-drink maker; America M?vil (AMX), a regional telecom-holding company that projects double-digit cellular subscriber growth in Mexico; and BBVA-Bancomer, the country's largest publicly traded bank, which is boosting lending and improving margins.

Playing Brazil is harder. The country is more vulnerable to Argentina and a lot farther from the U.S. than Mexico. It has faced devaluation, electricity shortages, and a sharp contraction--from 4.4% growth in 2000 to 1.5% in 2001. Next year, the economy could slow more. Still, Brazil's 160 million consumers remain a compelling market, though with few stocks to play it. One of the best bets is AmBev, Latin America's largest drinks company. Telemar, a fixed-line phone company that is expanding into wireless, is another top pick despite flat share performance in 2001. "They've got a solid base that provides cash and add-on business that will provide growth," says Julio Zamora, Latin American equities strategist for Morgan Stanley Dean Witter: A global upturn should also help commodity producers such as CVRD, a huge iron mining concern, and Petrobras (PTBRF), the Brazilian oil company, says UBS's Fraser. Petrobras, which has been hurt by industrial accidents, has a new chief executive.

Latin America's huge potential has disappointed shareholders many times. For now, they're watching the crisis in Argentina unfold, playing it safe in Mexico and Brazil and waiting to see what happens when the earth stops shaking. By Geri Smith in Mexico City


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