Latin America: Worst Emerging Market Return In December, Buy Select Financials, UBS Says

January 7, 2015

Barron's

Shares in Latin America tumbled 9.3% in December, underperforming other emerging markets.

The MSCI Latin America index fell 9.3% in December, underperforming the MSCI Emerging Market index (-4.8%), and the MSCI World index (-1.7%), UBS reports. All major countries in LatAm fell, but Brazil was the biggest laggard (-11.4%), followed by Argentina (-9.8%) and Colombia (-7.8%). For the full fiscal year, Colombia was the weakest (-22.3%), while Argentina was the strongest (+17.3%).

UBS prefers Latin America banks to those in Asia, where it is neutral, and to those in emerging Europe/the Middle East/Africa, where it is underweight. UBS is overweight banks in Peru and Mexico, and neutral on banks in Brazil (though it has a number of Buy ratings). UBS analysts write:

“Our overweight stance on LatAm banks reflects the sector’s positive earnings momentum, rising return on equity and attractive valuations. We forecast earnings-per-share growth of 17.5% in 2015 and 13.7% in 2016, well above emerging market peers at 9.9% and 11.5%, respectively. We are also positive on LatAm non-bank financials, given a decent growth outlook, resilient earnings and favourable valuations …

We are positive on banks in Peru (improving macro outlook, cost improvements and ROE upside) and in Mexico (macro recovery, strong earnings growth and supportive valuations). We remain neutral on Brazilian banks given the disconnect between the macro and micro outlooks. Key themes in 2015 are: (1) external risks (growth, flows, FX & risk appetite); (2) oil prices; (3) rising rates; (4) a focus on costs; and (5) asset quality.

… We reiterate our favourable view on non-bank financials in Brazil (insurance, card), given their resilient earnings and good growth profile. We are more cautious on exchanges, where we see limited upside for trading volumes in 2015. The key themes in 2015 will be (1) revenues diversification, (2) competition and (3) regulation.“

UBS has a buy rating  in Brazil, on banks Itau Unibanco (ITUB) and Banco Bradesco (BBDO), payment processor Cielo (CIOXY) and insurer BB Seguridade (BBSEY). It also likes financials in Mexico: Grupo Financiero Banorte (GBOOF), Grupo Financiero Santander Mexico (BSMX), Grupo Financiero Inbursa (GPFOY) and Gentera (CMPRF). Note that some of these names trade over the counter in the United States.

Among the biggest movers today: U.S.-traded shares of Mexico’s Inbursa are up 4.6% in afternoon trading, while Brazil’s Banco Bradesco and Itau are each up more than 3%.

Tags: bankings, funds, latam, latin america, markets, stock market
Posted in LatAm, Banking, Macro Economics, Funds