Latin Stocks Reel, but Should Rise Again

Call it the region with the samba stocks.

Investors in Latin American are hopping more than anytime in years to the beats of reward and risk.

Until October, stock markets in the region bounded as high as 80 percent. But uncertainties from East Asia swiftly chopped those gains by about half.

The brutal correction has left investors stunned and trading floors from Lima to Mexico City littered with high-value equities.

Specialists in Latin American stocks see bargains for the taking, but suggest holding back for at least a few months.

The turmoil in East Asia will likely persist, they say, and could worsen. Also, new measures in Brazil - Latin America's No. 1 economy and bellwether - should improve economic discipline but also provoke a downturn next year.

"Short term, we are advising investors to stay away, because the situation for all emerging markets is still so uncertain," says Jane Heap, Latin America strategist at Deutsche Morgan Grenfell, New York.

Still, the mix of improving economic fundamentals, robust growth, and rising entrepreneurship makes Latin America a dazzling long-term play, analysts say. "Long term, Latin America is very attractive," Ms. Heap says.

If you don't want to wait, analysts suggest Mexico, the region's soundest economy. Next on the list are promising stocks in Brazil and other regional economies.

Brazil, the Latin bellwether

Brazil leads the dance of Latin equity markets, and there's no sign the beat will end anytime soon. Its market rocketed 86 percent this year before Asian turmoil exposed the Brazilian currency to heavy selling pressure.

To head off a return of economic instability and hyperinflation, the central bank jacked up interest rates late last month to 46 percent.

Many analysts believe Brazil's currency, the real, is overvalued by about 15 percent. But the government is not about to tolerate a revival of inflation, which has fallen to single digits from a high of 2,500 percent in 1993.

The government also introduced an $18 billion austerity package, slashing 33,000 state jobs, speeding up the privatization of $60 billion in state enterprises, and hiking taxes. All that may slow the economy dramatically next year.

Investors willing to weather the coming downturn would do well snapping up shares in state-owned companies, such as in steel, electricity, and oil, analysts say. And the state phone company, Telebras (Telecomunicacoes Brasileiras SA), sits high on their buy lists.

"Earnings will go down for Telebras next year because of the slump in the economy, but it is still the best-value telecommunications stock in the region and maybe in the world," says Robert Berges, Latin America specialist at Merrill Lynch. Analysts predict a jump in share price from about $100 to more than $150 in a year.

Argentina has already pushed through austerity measures and stabilized its currency. But with more than 30 percent of exports going to Brazil, Argentina epitomizes regional dependence on that country.

"It's really guilt by association for Latin American markets," says Peter Treadway, who follows Latin American telecommunications at Smith Barney in New York.

Mexico tames finances

The most attractive Latin American market is Mexico, which tugs on the longest tether from Brazil. Analysts point to tight fiscal management that has restored much of Mexico's credibility since the 1995 debt crisis.

President Ernesto Zedillo just introduced a 1998 budget that holds the deficit at 1.25 percent of economic output, a smidgen for Latin America. The budget forecasts inflation falling from 15 to 12 percent as economic growth eases from 6.5 to 5.2 percent.

"Mexico has already gone through the shocks. They are not immune to instability, but they've gone through the worst and come out well," Mr. Treadway says.

Analysts favor Telmex (Telfonos de Mxico SA) and big cyclicals such as construction company ICA (Empresas ICA SA). They should hold their own until Brazil, and the region, get back on their feet.

"Once [Brazil] cleans up its act," Treadway says, "Latin America will be a grand-slam-home-run place to invest."