The
2007
LATIN AMERICA
RESEARCH TEAM
Analysts are as much in demand as Latin
American stocks.
Here are the ones voted best
at covering the
region. BY BEN MATTLIN
With Latin American equity markets surging,
sell-side firms are scrambling to add analysts and expand coverage to meet the rising demand for quality research. “We’re
planning a massive expansion,” says Rowe Michels, New York-based director of Latin American research for Bear, Stearns
& Co., which recently hired analysts to cover consumer products and real estate and is looking to increase coverage of
housing and construction.
Merrill Lynch also is actively expanding. Over the past year the firm nearly doubled the number of Latin American companies
it covers, from 66 to 111, increasing its research staff from 27 to 32, says Adam Quinton, Merrill’s New York-based
head of Latin American research.
The activity comes as no surprise, given the recent performance of the region’s capital markets and a plethora
of new equity offerings. Latin American stocks were up 10.8 percent this year through mid-May in local currency terms (15.4
percent in dollar terms), according to the MSCI Latin America price index, and that is on top of a 33.7 percent advance in
2006 and 32.9 percent the year before. Twelve initial public offerings came to market in the first quarter, two more than
during the corresponding period last year, putting 2007 on pace to surpass last year’s record IPO level.
“We’re still hiring to keep up with all those new stocks,” says Cristián Moreno, who last July became
director of research for Santander Investment Securities, based in New York. The firm now covers 155 companies, up from 135
one year ago, and boasts one of the region’s biggest research squads, with 38 analysts, seven more than last year’s
total.
To stay on top of developments in this sizzling marketplace, investors need top-quality, timely research — and
no firm is better at providing it than the newly merged entity of UBS Pactual, according to participants in our 2007 Latin
America Research Team survey. UBS led the team from 2003 through 2006, and late last year the Swiss global banking giant moved
to strengthen its ties to Latin America the same way it had strengthened ties to other emerging economies: by acquiring an
established regional firm and integrating the two operations.
"Thanks to Pactual, we have much deeper relationships with the local markets," says Damian Fraser, the firm's Mexico
City-based research director. UBS Pactual has 30 researchers covering 147 stocks,
up from 103 one year ago.
UBS Pactual earns 19 total team positions, the same number as the two firms’ combined teams last year (UBS had
16 and eighth-ranked Banco Pactual, three). Credit Suisse rises from fourth to
second place, with 14 team positions, four more than last year’s total, and Bear Stearns advances from fourth to third,
with 13 spots, three more than in 2006. Two firms that tied for second place last year, Merrill Lynch and Santander, slip
to fourth and fifth place, respectively.
Survey results are based on the responses of more than 300 money managers and investment professionals at more than
200 institutions that collectively manage almost $129 billion in Latin American equities. On the surrounding pages we highlight
the five analysts who are new to the first team.
Few markets hold as much promise globally as does Brazil, which rose 28.5 percent last year in local currency terms
(40.5 percent in dollar terms) and 9.2 percent through mid-May of 2007 (17.0 percent in dollar terms). Leading the way in Brazilian coverage is Pedro Batista (who also captains the second-place team in Electric
Utilities), who after the merger succeeded Marcelo Mesquita as head of UBS Pactual's 22-member Brazilian research team. The Rio de Janeiro-based researcher, who joined Banco Pactual in 1997 after graduating
from Universidade Federal do Rio de Janeiro with a degree in engineering, has adopted what one money manager calls a “chase-the-money approach.” Batista, 32, urged clients to buy Cia. Energética de São Paulo, Brazil’s partially state-controlled energy supplier, in January
2006, at 10.5 reais, on increasing energy prices and a stable cost structure largely thanks to its hydroelectric plants. In January, after the UBS Pactual merger, he reiterated his buy, at R19.9. As of mid-May the stock was up to R25.0, an increase of 138.1 percent since Batista's original call and
25.6 percent since his reiteration. "He thinks more like a buy-sider than a sell-sider,"
observes one enthusiast.
Carlos Sequeira, who after the merger was named co-leader (along with Stephen Graham) of the UBS Pactual Telecommunications
team, is also making his first appearance in first place. Sequeira, 35, earned an MBA from the Brazilian Institute of Capital Markets in 1999 and worked as
a telecoms analyst for a Brazilian investment bank before joining UBS in 2002. Clients hail the three-member team’s
May 2006 upgrade to buy of Net Serviços de Comunicação, Brazil’s leading pay-TV service and Internet access provider,
after a price dip; the stock zoomed up 88 percent by mid-May. In October the team upgraded Axtel, a Mexico-based telecom carrier,
to buy after it unveiled plans to acquire competitor Avantel.
“We decided to tag Axtell a buy after it had announced the acquisition of corporate data and long-distance provider
Avantel,” says Sequeira. "The acquisition was key to improve Axtel's coverage network and a trigger to the stock price."
The share price soared 125 percent through mid-May. "He's on top of everything going on in the space," says one investor of
Sequeira.
The Metals & Mining team at Credit Suisse led by São Paulo-based Roger Downey jumps from runner-up to first place.
In January the three-member team pegged Cia. Vale do Rio Doce, Brazil’s diversified mining giant, with an outperform
rating as part of an overall bullish view of iron ore pricing. Iron ore prices kept rising, and CVRD jumped 33.3 percent in
local currency terms (the American depositary receipts advanced 41.9 percent) through mid-May. One investor calls Downey “the
best source on iron ore market dynamics.” And no wonder: Before joining Credit Suisse in 2005, he spent three years
as a strategic marketing manager at CVRD (and 11 years before that with two of its rivals).
“I covered aspects such as industry analysis, marketing, sales, scheduling, project development, mergers and
acquisitions, and broader strategic aspects of the business and of the industry,” says Downey, 40, who earned an MBA
from the University of Western Australia in 2002. “Obviously, this in-depth understanding of the mining and steel industries
is a significant advantage in my job as an analyst. It provides me with understanding of how the corporations think, their
strengths, potential, threats and strategic direction.”
And Downey remains bullish. “CVRD is a company that has grown its market cap about ten times in the past five
or six years, and it still has much organic growth potential,” he says. “I am also bullish on the industry, especially
in relation to China, which will demand a lot more raw materials over the next decade.”
Santander’s seven-member Chilean research team returns to the top spot this year, but for the first time under
the direction of new team leader Raimundo Valdés, 30, who joined the firm in 2000 after graduating from Universidad Católica
de Chile with a degree in commercial engineering.
Chilean stocks jumped 31.4 percent last year in local currency terms (26.4 percent in dollar terms) and a further 16.0
percent (19.4 percent) through mid-May of this year, and the Santiagobased Santander team alerted investors to moneymaking
opportunities it saw in rising consumer consumption.
The team frequently highlighted its long-standing buy recommendation on clothing and home furnishings retailer Empresas
La Polar. “Our optimism was based on the aggressive expansion of the company’s successful business model,”
Valdés explains. “The model is based on focusing clearly on the medium- to lowincome segments, which in positive economic
periods are expected to post higher consumption growth rates, compared with other segments. In addition, this focus presents
an opportunity to develop a profitable financial division, given the importance of providing credit for such a target market.”
The team first recommended La Polar in September 2005, at 1.53 Chilean pesos. Through mid-May the shares had jumped
to 3.02. “Raimundo and his team have consistently given us very good reports, insights and access to management in a
large group of companies,” says one buyside supporter.
Rising consumption is widespread across Latin America. Domestic demand rose 6.7 percent in real terms last year, 1.4
percentage points faster than in the year before, as measured by the Institute of International Finance. Real gross domestic
product grew 4.9 percent in 2006, partly sparked by a jump in prices for the region’s key commodities exports, such
as cocoa, coffee, iron ore, copper and crude oil. Currencies stayed strong and inflation rates slowed through most of the
region; the average consumer price inflation slowed to 4.8 percent last year.
An additional consequence of Latin America’s new wealth and economic stability is that more institutional money
is coming from local investors. “Our client base used to be dominated by emerging-markets specialists in New York and
London, but now we’re servicing Brazilian hedge funds and the like,” says Merrill Lynch’s Quinton. At the
same time, he says, many Latin American companies are no longer simply niche plays: “They have become so globally competitive
that anybody might want to invest in them, not just emerging-markets specialists.”
There is yet a further benefit, Quinton observes: “Economic stability
has created greater access to lending, which means people are able to finance
bigger and higher quality housing.”
Reading these trends astutely helps lift Merrill Lynch’s equity strategy team led by São Paulo-based Pedro Martins
Jr. from runner-up to the top spot. Martins, 34, a 2004 graduate of Fundação Getulio Vargas in São Paulo with a degree in
business administration, worked at JPMorgan before joining Merrill in 2005. “Pedro does not let himself get caught up
in the moment. He stays calm and looks through the hype into what is really going on, which allows him to make clear, well-thought-out
forecasts,” says one portfolio manager, who points to Martins’s reassurances last fall that presidential elections
in Brazil and Mexico would not upset those nations’ economic growth. So
far he has been correct.
Regarding Brazil, President Luiz Inácio Lula da Silva “has limited incentives to deviate from market-friendly
economic policies in his second term,” says Martins. As for Mexico, “Domestic consumption, infrastructure and
housing, and earnings growth are the main bottom-up themes that should remain robust for Mexican equities.”
Researchers believe equities will remain robust across Latin America. “There’s still a sense that these
markets are underperforming their potential,” says Quinton. “What’s most encouraging to me is the entrepreneurial
drive that’s clear from the huge upsurge in new equity offerings. In this kind of environment, it’s hard to see
any big clouds on the horizon.”
