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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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