Fidelity Investments is increasing holdings of Chilean stocks that this month plunged to the cheapest in six months relative to Latin American peers, fund manager Adam Kutas said.
Kutas, who oversees $3 billion of Latin American equities, increased holdings of Chilean stocks that stand to benefit most from continued regional growth and plans to buy local retailers and banks, he said yesterday in a telephone interview, without identifying companies. The biggest equity rout in three years fueled by concern Europe’s debt crisis will crimp global growth has also created opportunities among Brazil steelmakers, while Mexican valuations “are not that compelling,” Kutas said.
The 18-share MSCI Chile Index slumped 21 percent since June, the most among major regional indexes, as a consumer lending scandal and record-low government approval added local momentum to the global selloff.
“Valuations have improved dramatically given this correction,” said Kutas, whose regional fund beat 95 percent of peers in the past year, according to data compiled by Bloomberg. “I see this more as a buying opportunity of what I consider the blue chips.”
The Chilean index fetched 13.6 times reported earnings on Oct. 4 compared with MSCI EM Latin America Index’s ratio of 9.65, representing the smallest premium since March, according to data compiled by Bloomberg. The Chilean index’s price-to- earnings ratio since then has increased to 15.7.
As of Aug. 31, Fidelity’s Latin America Fund was invested 58 percent in Brazil, 19 percent in Mexico and 12 percent in Chile, according to data provided by the company. The fund has dropped 15 percent in the past 12 months. It has beaten 45 percent of its peers with a 6.4 percent return over the last five years, according to data compiled by Bloomberg.
Volatility on Chile’s benchmark Ipsa index increased after retailer Empresas La Polar SA revealed in June that it had restructured loans without the consent of hundreds of thousands of clients and government approval ratings plunged, Banco de Credito & Inversiones said in an Oct. 10 note to clients.
“The Ipsa’s volatility has been higher than that of the Bovespa and MSCI Latin America indexes, which wasn’t the case in prior crises,” BCI wrote.
President Sebastian Pinera’s approval slumped to 26 percent in an August poll by Santiago-based CEP, the lowest in the five elected governments since the dictatorship of Augusto Pinochet.
The Ipsa’s 20-day volatility reached 41 percent yesterday, compared with 32 percent for the Bovespa, according to data compiled by Bloomberg. The Ipsa reached a 12-month high in its 20-day volatility of 49 percent in August, compared with a 12- month high of 44 percent for the MSCI Latin America index. Twenty-day volatility measures how much in an annual percentage a price varied from its average in that period.
Among stocks in the industries Kutas is targeting, retailer SACI Falabella, the country’s largest publicly traded company, has lost 19 percent this year, while peer Cencosud SA, Latin America’s third-largest publicly-traded retailer by sales, has retreated 22 percent. Banco Santander Chile, the country’s largest lender by assets, has fallen 16 percent this year. Banco de Chile, the second-largest lender, has fallen 8.7 percent. The MSCI Chile index rose 1.2 percent to 2,263.93 at 1:13 p.m. Santiago time, poised for the biggest weekly gain since March.
In Brazil, “from a deep value perspective, definitely the steel sector is looking very interesting,” Kutas said. “That sector has gone through some very negative structural changes in the last few years. Valuations are very attractive, and we are starting to do some more work there if we can find some interesting ideas.”
Gerdau SA, Brazil’s largest steel producer, fell 38 percent in the year to date. Rival Cia. Siderurgica Nacional SA has fallen 45 percent in the same period.
Neutral on Mexico
Kutas said he remains neutral on Mexico.
“A lot of the headwinds that Mexico has faced from a loss of competitiveness to China has probably run their course,” he said. “At the same time valuations for a lot of companies are not that compelling so it’s hard to get excited and find ideas within the Mexican market to put the capital to work.”
Mexico’s IPC index trades at 17.7 times trailing earnings, versus 8.4 times for Brazil’s Bovespa. In August, that gap was at the widest in at least seven years, according to data compiled by Bloomberg.
“Latin America is very well positioned, given its very positive sovereign backdrop, the population continues to grow, its positioning in commodities is very strategic and its consumer class continues to grow in the region,” he said. “To me those provide a very positive backdrop to invest.”
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