By Joseph Hogue CFA
Cemex (CX) came to market with an equity sale this month on the partial sale of its Latin American subsidiary Cemex Latam Holdings. The offer was said to be three-times oversubscribed and the markets were optimistic given the performance of emerging markets over the last few years.
While the company raised $1.14 million from the sale, investors in the shares were not so lucky in Friday’s first day of trading. Shares listed on the Colombian exchange dropped 2.7% against a loss of almost a half a percent in the general market.
The case reflects the need for quality analysis of the region and investment opportunities. While the economic outlook for Latin America is generally better than the developed world, there will still be winners and losers in assets. Of the six major markets, only the iShares MSCI Brazil (EWZ) and the iShares MSCI Peru (EPU) have outperformed the S&P 500 over the last six months. Indexes for Colombia, Mexico, Argentina, and Chile, all have underperformed by between 5% and 10%.
I looked at the record lows in debt yields last week in an article warning investors to chase bonds only so far. While emerging sovereign debt pays an incremental yield over domestic debt and treasuries, it could also fall more rapidly in the event of another credit crisis. The PowerShares Emerging Market Sovereign (PCY) dropped 40% from September to October 2008 compared with a decline of 24% in the iShares High Yield Corporate (HYG).
If the record low interest rates come back to haunt bond investors, they should still provide a benefit to equity investors in the region. As long as revenue does not fall dramatically, companies could see higher net earnings due to lower interest costs.
It is still uncertain whether Europe is working its way out of its debt crisis and growth in the U.S. looks to be 1.5% or weaker for the next two quarters. A further loss in market sentiment will hit the higher-beta emerging markets harder and investors need to be ready for the ride.
Look for relative safety in EM domestic consumer stocks as well as the companies deemed strategic to the state. While a company like Petrobras (PBR) may not outperform over the longer term due to its place as the government’s unofficial piggy-bank, the implicit backing of the state should make it less volatile than smaller companies.