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STACY STEIMEL

Managing DirectorHead o Latin America EquityPineBridge Investments,Santiago

Latin America Small & Mid Cap Equity

Q. What is your outlook for Latin American

small and mid cap equity this year?

A. The perormance o small and mid cap

stocks in Latin America will depend onundamentals and ows. We are extremely

positive on the undamentals. Funds ows

have also been extremely positive or

the region in 2012, rising to US $4 billion.

There are two trends worth explaining with

respect to ows: frst, the bulk o the ows

have come rom dedicated global emerging

market unds and second, the ows have

been predominantly into Exchange Traded

Funds, dissipating their impact on any

individual stocks.

We are one-third o the way through ourth

quarter 2011 earnings season and it has

not been a stellar quarter so ar. Only

23% o Latin American MSCI companies

have reported above consensus numbers.

While it is still early days, and Mexico and

Brazil have ared better than Chile which

is already hal fnished, it is important to

highlight that the Q4 earnings season is

a lagging indicator given the sharp GDP

recovery we expect rom here.

Another interesting point to make with

respect to small cap stocks, is that their

perormance crossed over large cap stocks

in December and since December 1st, they

have outperormed their large cap stocks

by 5.17% (Source: Bloomberg). This is

typical o the behavior that we witnessed in

2009 when Latin America small cap stocks

outperormed their large cap counterparts

by 20% in the post US fnancial crisis

rebound.

Q. To what extent is the performance of

Latin America small and mid cap stocks

correlated to commodity prices?

A. Correlation with commodity prices

tends to be low in this asset class as Latin

American small capitalization companies

are more ocused on the domestic

economies. The correlations can,

nevertheless, be high with commodities

during specifc periods given the act

that some o the underlying economiesdepend on commodities to generate tax

revenues. During 2011, the MSCI Small

Cap Index had a relatively low correlation

with the S&P Commodity Index, just

0.654 compared to the Large Cap Index

at 0.699, both measured in dollar terms.

I you break out the commodity index into

its component parts, like energy, sot

commodities and metals, the correlations

all even urther or small cap stocks, and

particularly against our strategy.

Q. Which countries or sectors do you

currently favor?

A. The consumer continues to be a

medium term theme. Another interesting

move that we have seen is an emphasis by

local governments on big inrastructure

projects. From Mexican ports to

Colombian petroleum pipelines and

Brazilian airports, these projects have

been bid and are now underway. This

inrastructure spending in 2012, and the

anticipation o a global recovery in the

second hal o 2012, is liting industrial

stocks which are our second avorite

theme.

Valuations or Latin America are currently

mixed. Whilst Colombia and Mexico are

extremely stretched, both Brazil and Peru

are particularly attractive on a valuation

basis despite the year to date rally in the

region. While Chile looks expensive on

its own headline, it is actually trading at a

discount to its own history. Market events

in 2011 are still aecting the multiples

o retail companies and there is pending

legislation that could have an important

eect on the sector. Further, ourth

quarter earnings have been sot as hal

o the companies have already divulged

results. Thus, we are particularly keen on

the Andean countries, ex-Chile, and a re-

rating in Brazil. In Mexico, we urge caution

as we move toward the hotly contestedPresidential elections at mid-year.

Q. Are there any sectors you are avoiding

at the moment?

A. In 2011, deensive sectors like utilities

and telecommunications were the best

perormers. 2012 to date has been quite

the opposite, with consumer discretionary

and interest rate sensitive sectors leading

the charge. Many o the names that

underperormed in 2011, particularly some

o the industrial names, have started to

outperorm again.

Q. What do you consider as the biggest

risks for investing in Latin America small

cap equities in 2012?

A. Although Latin America is less exposed

to European sovereign and US growth

concerns, the low liquidity o the asset

class is an issue to consider, but looking

to the medium term creates a clear buying

opportunity. Risks in Latin America are

more geared toward domestic issues

such as governments trying to attract

investors to und inrastructure projects

or consumer companies managing to

accelerate growth organically or through

M&A. We frmly believe avorable

demographics, the emerging middle

class, economic ormalization and market

riendly governments in Latin America are

enough to mitigate the eects o a potentialexternal shock.

March 2012

Q &A

www.pinebridge.com

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