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Where To Dig Up Latin Gems


How should investors play Latin America, given an impending rise in U.S. interest rates and a projected slowdown in commodities demand from Asia? That's a question on many investors' minds after a major runup in most regional bourses in 2003 but more modest gains in many markets so far this year. Jay C. Garcia, managing director of Latin American equity research at Samuel A. Ramirez & Co. in New York, is steering investors into undiscovered small and midsize companies in Brazil and Mexico. Personal Business Editor Lauren Young spoke with Garcia about investment opportunities in the region.

Last year was stellar for many Latin American equities markets. How is 2004 shaping up so far?

Three out of five of the world's best-performing markets were in Latin America in 2003 [Argentina, Brazil, and Venezuela]. That performance came from a combination of factors, and it's relevant to what's happening today. Most important is global liquidity from low interest rates, triggering a record high inflow of $18 billion in funds into the region last year. The second one is that the economic performance of many Latin American countries has been very stable, and now most of the economic worries investors have had in the region have subsided.

Will higher U.S. interest rates hurt Mexican stocks as much as in 1994?

Definitely the biggest concern is when the U.S. Federal Reserve will raise interest rates and how that will affect flows into the region. Right now, the Mexican economy is performing quite well. The inflationary pressure isn't there, and the growth in the economy is really being fueled by internal consumption. Mexico's economy should grow 3% to 3.5% this year. At current levels, I think Mexico's benchmark Bolsa stock average can gain another 10%.

Will the commodities boom continue?

I don't think it will last for many more years. All eyes are on China. But it's not slowing down as much as people feared. That still translates into good performance in Latin America. Demand is strongest for the region's steel, paper, and iron ore. We recently met with the chief financial officer of Brazil's Companhia Vale do Rio Doce, the world's largest iron-ore producer, and he said orders were quite strong. We also spoke with Grupo Mexico, one of the world's biggest copper, silver, and zinc producers, and they confirmed that orders from China continue to be very strong.

Where can you get the most bang for your buck in Latin America?

People tend to put money in highly liquid Latin American blue chips -- because if there's another crisis worldwide, they want to get it out quick. But I am recommending small- and mid-cap companies. They are still liquid, the fundamentals are good, and they are overlooked. I like Rossi Residencial, a Brazilian construction company. Based on its cash flow, the company is trading at a significant discount to its peers. There's still a 50% upside in the stock. I also like the Brazilian steel companies, especially producers Companhia Sider?rgica Nacional and Gerdau.

In Mexico, I like Corporaci?n Geo, another construction company. I also like FEMSA, one of the largest integrated beverage companies. They ended a joint venture with Interbrew, which was curtailing strategic growth. Now they have teamed up with Heineken, a partner that's more friendly to their business. The company is doing fantastically well. Revenues are growing 37% year over year.

What's behind the recent sell-off in Brazil?

A gain of 134% in one year, as we saw in 2003, is an abnormality. So, of course, there's going to be profit taking. I think the Brazilian market will see a healthy 25% increase from current levels in the next six months. But I'm definitely not telling investors you will see another 100% increase.

What are your biggest concerns for Latin America?

While investor's expectations are definitely higher than they should be, my greatest worry is still the impact of rising rates in the U.S. In addition, we are obviously very nervous about Venezuela, which has experienced widespread unrest. On Aug. 15, there's a referendum scheduled to see if President Hugo Ch?vez will stay in power. If he remains in office, investors will shy away from the country. If Ch?vez needs to step down and the country has democratic elections, Venezuela will perform well.


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