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Don't cry for Argentina, Brazil or Chile
Latin American stocks and funds sizzled for the third year in a row. Can they shine again in 2006?
November 30, 2005: 3:02 PM EST
By Paul R. La Monica, senior writer
Latin Love: The iShares S&P Latin America 40 Index, which tracks top Latin American companies, has surged this year.
Latin Love: The iShares S&P Latin America 40 Index, which tracks top Latin American companies, has surged this year.
More than oil and minerals
Latin American companies in several diverse industries have been big winners this year.
Company Industry YTD price ch. 
Quilmes Brewing 98.8% 
Net Servicos Cable 95.2% 
Bancolombia Fin. services 84.1% 
Ambev Brewing 66.0% 
America Movil Telecom 63.1% 
Telecom Argentina Telecom 24.6% 
 * based on prices as of 11/29/05
 Source:  Thomson/Baseline

NEW YORK ( – Who says it's been a challenging year for American stocks?

Sure, in the United States stocks struggled for much of 2005 and only recently have shown signs of life.

But for Latin America, it's been a much different story. According to mutual fund tracking firm Morningstar, Latin American funds are up more than 50 percent this year after returning nearly 40 percent in 2004 and more than 60 percent in 2003.

Of course, much of the success in Latin America can be summed up in one word: oil. Rising energy prices last year and this year have been a big factor behind lifting the economies of Venezuela and Brazil.

To that end, several of the best-performing Latin-American based American Depositary Receipts (ADRs) this year are energy companies, according to data from Thomson/Baseline. Shares of Argentine oil company YPF (Research) are up more than 32 percent this year while Brazil's Petrobras (Research) has surged nearly 70 percent.

Oil slick

So with energy prices retreating from the record high levels of earlier this year, are Latin American stocks a risky bet for 2006? Not necessarily.

A further pullback in oil might not hurt the entire region, said Bruce Zaro, chief technical strategist with Delta Global Advisors, an investment advisory firm based in Huntington Beach, Calif.

Zaro points out that despite falling energy prices, mining companies such as Brazil's Companhia Vale do Rio Doce (Research) and Southern Peru Copper (Research) have done well and continue to look attractive.

"My take on Latin America is that it's more of a basic materials play than oil. Basic materials companies sometimes trade in sympathy with oil but other times they buck the trend and I think they could hold up," Zaro said.

However, one fund manager said he doesn't expect oil prices to fall much lower thanks to strong demand for energy from China.

"We remain pretty optimistic about the long-term price of oil and are not expecting it to come down all that much. The emergence of China as a large source of demand for energy suits Latin America well and should reduced the cyclicality that we have traditionally seen there," said Julian Thompson, manager of the RiverSource Emerging Markets fund, which owns Petrobras.

Another fund manager also said that Latin American industrial and material companies look attractive because of Chinese economic expansion.

"Because of raw materials demand, Latin America is a China play," said Gary Anderson, assistant portfolio manager with the UMB Scout Worldwide fund, which owns Petrobras, Brazilian aircraft maker Embraer (Research) and fertilizer producer Chemical & Mining Co. of Chile (Research).

In addition, shares of several large cap Latin American stocks that are not in the energy sector have also done quite well this year due to healthy economic and earnings growth throughout the region.

Some of the winners include Telecom Argentina (Research), Mexican wireless telecom America Movil (Research), Brazilian cable company Net Servicos (Research), Brazilan brewer Ambev (Research), Colombian financial service firm Bancolombia (Research) and Quilmes (Research), a brewer that's headquartered in Luxembourg but does most of its business in South America.

Bail on Brazil?

Still, there are some concerns in the region outside of oil. Brazil's economy has started to show signs of cooling down, prompting fixed income research firm CreditSights to write a report titled "Brazil – When Do We Call it a Recession?"

Christian Stracke, emerging markets strategist with CreditSights, explains that third-quarter gross domestic product (GDP) figures in Brazil were lower than expected and this has raised fears of a slowdown that could spread to other countries in South America, most notably neighbor Argentina.

But Thompson thinks fears of a slowing economy in Brazil are overdone, especially since the country still has a healthy trade surplus due to exports of oil, materials and agricultural goods. He thinks that interest rates will be lowered next year and that this should prevent the economy from heading into a tailspin. With that in mind, he said his fund owns Brazilian retailer Lojas Renner and banks Bradesco (Research) and Unibanco (Research).

And Stracke adds that other areas of Latin America should be able to weather a downturn in Brazil if one takes place. So investors shouldn't bail on the entire region. Mexico, for example, is more likely to benefit from continued strength in the U.S. economy, he said.

As such, Wendell Perkins, manager of the JohnsonFamily International Value fund, said that one of his fund's top picks is Mexican cement company Cemex (Research). He said Cemex has benefited from demand related to the rebuilding effort in the Gulf Coast following Hurricane Katrina as well as increased spending on highways in the U.S.

But instead of trying to find individual stocks, Zaro said investors looking at Latin America might be wise to buy the iShares S&P Latin America 40 (Research) exchange-traded fund, a security that trades like a stock but owns shares of companies like mutual funds, in order to minimize exposure to one particular country or sector in the region.

"The Latin American markets have had a long history of being way up and way down. They'll get whipsawed but those risks are mitigated in the ETF," he said.

But Stracke said investors should still be cautious. He said one of the biggest concerns regarding much of Latin America is the possibility of major political change next year.

Presidential elections are set for several Latin American nations in 2006, including Brazil, Colombia, Ecuador and Peru. So Stracke said this is another element of risk for investors to consider. He added that because Latin American markets have performed so well for the past few years, any whiff of a looming financial crisis could cause investors to run for the exits.

"In emerging markets, contagion is a serious problem," said Stracke. "If investors do poorly in one major emerging market country they often rush to sell assets in other emerging markets whether or not the fundamentals are similar."

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