Nov 12 2008
Latin American Investments: A Hot Bed of Opportunity
Late October, Brazil and Argentina announced that their governments would buy up private assets in financial markets.
Brazil’s plan would allow its state-controlled banks (Banco do Brasil and Caixa Economica Federal) to buy stakes in private financial institutions. Argentine President Cristina Fernandez de Kirchner announced that the government would take over the $30 billion private pension fund.
These announcements pushed Latin American markets well into the red, but they also knocked Spain’s Ibex index off 184 points, or 2%.
That should come as no surprise. Spain and Latin America have many economic ties, and some Spanish companies do so much business across the pond that 29% of net profits come from that region.
So when news of nationalization hit last week, naturally Spanish markets shuddered… With good reason.
Just look at Bolivia and Venezuela, both controlled by heavily nationalistic leaders.
Venezuela has had three major blackouts this year. Some areas spent more than two weeks without power at a time. Bolivia continues to buy up local and international stakes in its natural gas pipeline infrastructure, but it’s been shipping less than 50% of its contracted amount of natural gas to Argentina since September.
Problems like this led to a severe power crisis last summer, and forced Argentina to buy energy from Brazil.
So the question is… Will government intervention result in protection from global markets, or will pensioner and investors alike be holding worthless papers and wondering where all their money went?
And how will markets in both Latin America and Spain respond?
We know the first knee-jerk reaction was not good. In fact, after the news, Argentina’s main index fell 8.3%, Brazil’s fell nearly 7%, and Mexico’s dropped more than 4.5%.
And yet, markets started to rally back a couple days later… And get this: Spanish banks are posting jumps in earnings, thanks in part to their Latin American divisions. That flies directly in the face of what some analysts were saying last week after those nationalization announcements.
Let’s take a closer look.
Banco Santander (STD:NYSE), Spain’s largest bank, announced net profits from its Latin American units climbed 6% in the first nine months this year compared to the first nine months of 2007. And the group’s net profits rose a collective 9.1% for the past nine months, and 4.3% in the third quarter alone.
Here’s what’ll blow you away though… The bank’s third-quarter profits for Latin America clocked in at 1.12 billion euros (US$1.45 billion) – an all-time high for the group.
I know what you’re thinking, “Okay, those numbers are good, but it’s only a matter of time before bad loans and credit crunches catch up to these guys, right?”
Not quite…
You see, Spanish banks operate differently than other international banks. They chose not to buy any of the risky subprime mortgages during the banking heyday and the housing bubble.
Actually, one Spanish bank, BBVA Group (BBV:NYSE), who also posted good earnings for the third quarter this year (net profit is up 5.6%), even called U.S. banks “immoral” lenders.
Have non-performing loans (NPLs) increased? Sure… BBVA’s NPL ratio jumped from 1.2% to 1.5% and Santander’s ratio climbed to 1.6% from 1.3%. But get this… Santander’s loan coverage ratio is at 116%, meaning it has enough cash to cover those non-performing loans. BBVA’s coverage ratio is even higher at 127%.
These guys are at rock-bottom prices, and I consider both strong companies. Both have sizable dividends as well. Could they go lower? Yeah, maybe. We’ve watched these financially stable companies get halved over the past year, just for being in the financial business.
The IMF still maintains that Latin America will weather this storm… that countries are expected to deal with this current crisis better than previous crises… and that the region will grow 3% next year, which is close the emerging market average forecast.
It’s time to take a wide-angle, long-term view on growing markets with strong companies. That’s Latin America and these two companies.
I hope your trip is something else than plain tourism. Anyway you will enjoy it if it is.
But if you want to see a little more of the productive and investing side of the country, even maintaining tourism as first target, you could extend a few days to visit the following cities in your way from Bariliche to Buenos Aires:
Mendoza, wine industry, and some heavy industry like IMPSA, selling turbines, huge generators, etc, to the world, including Asia.
Cordoba, automotive industries, including plants of european, american brands, autoparts, etc, and also software industry, including Motorola, Cisco, software factories, and the like.
Rosario, that moves great part of grain production, from it port terminals, and have around several plats of agricultural heavy equipment. Between the the last to cities and then going south to B.A., you cross thru the estancias that produce soybean, corn, wheat, girasol, using complex financing methods; help or business are not expected from banks. Banks operate almost as government regulated branchs. The big money is not processed by banks, and use complex and almost not legal ways to flow, to avoid being trapped. Like christians in the first year of catacumbs free markets are not apparent, but if you get the confidence of the people that move businesses, you can find lots of opportunities and information, even being near to the next crisis.
I only refferred to a small horizontal channel from Mendoza to Buenos Aires.
More to come, if you dont mind
Hi, Carlos.
Thanks for all the great information. You’re absolutely right that we should be looking at a number of different industries across both Chile and Argentina.
When I return I’ll be writing a special report on five separate industries, though with a focus on Chile for now.
To be honest with you, I’m a little concerned about Argentina’s economy, more so than either Chile’s or Brazil’s. And yet, the country has such amazing potential, particularly in agriculture, telecommunications, regional banks, and yes, alternative energy.
I know Argentina is home to the largest wind farm in Latin America, and I’ve always been keenly interested in the growth of alternative energy.
I think there’s so much room in all of Latin America for many types of energy generation.
But I’m still a little hesitant to write a glowing report on the industry in a country that’s nationalizing big chunks of private funds and companies.
(A little government support is no big deal, and can even be encouraging, but outright nationalization scares me.)
To get back to your comment, I won’t be able to take any side trips to Mendoza or Cordoba. My travel arrangements have already been made, and it’s straight through from Bariloche to Buenos Aires.
Hopefully, I’ll get a little taste of the wine country when I’m in Santiago.
But please, keep the information coming! I welcome it all, and thanks for writing in.
Cheers,
Sara Nunnally
Editor
Taipan Publishing Group
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