Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Urban Larson, manager of the F&C Latin American Equity fund.
Latin American markets outperformed mature markets in the last year, driven by lack of exposure to subprime, along with strength in commodities and resilient domestic growth. Latin American central banks were quick to react to inflationary concerns, raising rates in Brazil, Mexico, Columbia and Peru. Together with little sign of slowing credit growth, this increased the strength of the financial sector. Lending growth rose at 25%-35% year-on-year, while in Brazil mortgage lending grew by 89% for the first half of 2008. We are currently positive on the banking sector, particularly in Brazil, which should continue to demonstrate solid balance sheets, high levels of profitability and strong lending growth.
We remain underweight in commodity stocks, particularly materials, and are cautious on energy and utilities. In Brazil and Mexico, we like homebuilding and infrastructure – the former due to strong earnings and the latter as a result of ambitious multi-year investment plans. In Chile, we are concerned about the weakening economy and pension funds increasing investments outside the country. The Colombian economy is slowing, but at 4%-5% it is progressing well. The Mexican economy is also slowing due to exposure to America, and earnings could disappoint.
Overall, in the short-term we believe Latin American markets have over-corrected in recent months. With stocks at attractive valuations, investors may be pleasantly surprised by the resilience of earnings in most markets, particularly Brazil.
My first stock pick is Unibanco (NYSE:UBB), Brazil’s fourth-largest bank. Unibanco has improved its operations by introducing cost-cutting measures and is now more efficient. Historically it was the least profitable of the four big banks, but the gap has narrowed. Returns in equity are very similar to Bradesco (the top Brazilian bank) and not that far behind Itau, which has always been the most profitable. With Unibanco’s book value at 1.4 times 2008 versus Bradesco at 2.4 times 2008, the stock is good value by comparison. It has excellent exposure to consumer lending and a longer track record in consumer lending than the majority of its rivals, which is where most of the growth currently exists. Also, the quality of its portfolio has improved, with high-quality Brazilian corporates borrowing domestically as the international markets are closed. Unibanco is well placed to benefit from this.
Secondly, I like Argentina’s Tenaris (NTSE:TS), the world’s leading producer of seamless steel tubes used by the oil industry in wells, pipelines and refineries. It specialises in custom-made tubes with special fittings and coatings for extreme conditions, such as deep water offshore drilling. It not only supplies the pipes but in many cases installs them, giving them an advantage on quality, service and efficiency that is hard to beat. The company has a truly global vision. Its biggest customers include Pemex (Mexico) and Saudi Aramco, and recent US acquisitions have made it the leading supplier in America. Tenaris is focused on adding value to its products rather than simply increasing volumes, and most of its growth has come from higher margin products and small volume increases. The stock is trading at a very reasonable valuation (a pe ratio of 7.1 times for 2008), which is a small discount to its peer group across the oil services sector.