Brazil may dominate the region’s markets, but more appealing investment fundamentals exist in some of Latin America’s smaller economies.

Released: June 27, 2012
Length: 3 Minutes

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Watch this 3 minute video to see how Datastream Pro PA’s StarMine predicted surprises and analysts’ aggregates forecast shows that the Latin American bright spots appear to be in both Mexico and Chile—and not the heavyweight Brazil.

Mention Latin American stocks to any investor, and their mind is likely to fly immediately to Brazil, the region’s heavyweight market and a member of the iconic “BRIC” (Brazil, Russia, India and China) group of emerging markets expected to dominate the landscape by mid-century. The problem is that at present, it isn’t doing so well in generating returns for investors.

That hasn’t always been the case. Collectively, the three most liquid markets in Latin America – Brazil, Mexico and Chile – have trounced the total return of the S&P 500 index over the last dozen years (Chart 1).

Chart 1:  The Thomson Reuters Brazil (blue line) and Thomson Reuters Mexico(red line) indices total returns of about 450% in the past 10 years have outpaced both Thomson Reuters Chile’s 300% (grey line)and the S&P 500’s (green line) 60%.

While the latter has risen 60% in that period, the Thomson Reuters (TR) Brazil and Thomson Reuters Mexico indices are more than 450% higher, while the Thomson Reuters Chile index is 300% higher. But the performance gap between Brazil and its peers is widening, according to these TR country indices. TR Brazil has displayed the worst performance in the region, falling 20% in the years that have elapsed since the US market peaked in October 2007. In the lead instead are TR Chile (20% higher) and TR Mexico (up 13%).

Chart 2: Since the S&P 500 index market top in October 2007, the 23% total return of the Thomson Reuters Chile index (grey line)has edged out the Thomson Reuters Mexico index’s total return of 13%, as well as the S&P 500 index’s -5% and the Thomson Reuters Brazil index’s -20%.

Indeed, if you’re looking for a way to invest in Latin America, then Mexico and Chile appear to offer the most relatively attractive prospects as well. StarMine’s analyst 12-month forward estimates for earnings in their Latin American universe are looking better than they did earlier this month largely because of higher EPS estimates for integrated energy giant Ecopetrol, the single largest stock in Colombia. Digging into the data, however, it’s clear that while estimates for Mexican and Chilean corporate earnings forecasts 12 months out are fractionally higher in recent weeks, analysts have actually lowered their estimates for Brazilian companies by 1.6%. When it comes to the top line, StarMine’s Predicted Surprise (the percentage point difference between StarMine’s SmartEstimate, and the consensus estimate) percent for forward 12-month revenue indicates slight gains for both Mexico and Chile – hard to pull off in the current global economic climate – but a flat overall outlook for companies in Brazil.

Of course, it’s not all sunshine and roses. StarMine’s top-rated analysts see negative Predicted Surprises for earnings, based on data gleaned in the last 30 days. The region as a whole has a negative Predicted Surprise of -1.5%, with Brazil recording a negative Predicted Surprise of -1.4% and Chile offering a -2.1% reading. In that context, Mexico looks relatively appealing with its own -0.7% Predicted Surprise for earnings.

Given that investing is (or should perhaps ideally be) a long-term strategy, it also makes sense to look at the outlook for the next five years. StarMine analysts’ aggregate measures forecast that Brazilian companies may see their earnings rise by 5% over the next 5 years, compounded – although the current market price implies that earnings will decline by around 4.5% in that period. That pattern makes Brazil uncannily like the average Eurozone market! The data with respect to Mexico and Brazil paint a more appealing picture, however. The five-year earnings growth forecast for Mexico is now at nearly 8%, with the market implying that it’s around 7% — a narrow gap. For its part, Chile has a forecast compound earnings growth rate of 16%, although the market currently is pricing in growth of less than 13%.

The Mexican market also looks somewhat intriguing from a relative performance standpoint (Chart 3).

Chart 3:  The relative total return of the Thomson Reuters Mexico index may be poised to rebound from it’s recent underperformance versus the U.S. S&P 500 index.

The TR Mexico Index has been steadily outperforming the S&P 500 for the last five years; the jagged upward pattern is now showing its weaker side. That may offer an opportunity for interested investors to lighten up their US stocks, exchanging them for Mexican holdings.

If you’re looking for a way to profit from Latin American emerging markets, the message seems clear: Mexico and Chile offer better prospects than does the region’s behemoth economy, Brazil, at least at this point in the global economic cycle. And in contrast with some high-growth markets, both are liquid enough to absorb an influx of new investment.