Crisis Puts an End to Americas' Bull Run

JANUARY 2, 2009
Wall Street Journal
By ANTONIO REGALADO
Investors began 2008 thinking stocks in Latin American might outperform those in other parts of the world again. And the region's indexes did remain steady or even rose through midyear.
But by year end, Latin America had been hammered along with everyone else, ending the region's five-year run of bull markets and big trade surpluses.
Morgan Stanley's weighted index of regional stocks, the MSCI Latin America Index, sank 53% in U.S. dollar terms, a big reversal from 2007's 47% rise, which followed the 39% jump of 2006.
Slumping prices for oil, metals and foodstuffs hit such blue chips as Brazil's Petróleo Brasileiro SA, whose local listing fell 48%. The devaluation of the Mexican peso left half a dozen companies in Mexico near bankruptcy due to bad currency trades. Growth in domestic demand for goods and services slowed sharply throughout the region as the year wound down.
U.S. and other foreign institutional investors fueled the selloff, pulling $13.4 billion out of shares of companies traded on Brazil's Bovespa through November. In Brazil, Latin America's largest economy, the benchmark Bovespa stock index shed 54.8% in U.S. dollar terms.
North of the U.S. border, Canada's stock market held up well through the middle of 2008, buoyed by high commodity prices, but it too succumbed to the global downdraft. The TSX/S&P Composite Index, Canada's benchmark index, finished down 35%. It is dominated by stocks in the energy and materials sectors, whose prices tumbled in the second half of the year.
Some of Canada's big winners early in the year -- such as fertilizer giant Potash Corp. of Saskatchewan -- took the hardest hits; its stock price ended the year down 38%. The Canadian dollar also swooned, weakening 18% against the U.S. dollar, which would have magnified losses for U.S. investors in Canadian stocks, since the shares would be worth even less in U.S. dollar terms.
Few Latin American shares managed to end higher. Mexican discount chain Grupo Elektra SA, rose nearly 80% on expansion of sales at its discount stores, which began offering inexpensive automobiles made in China, making it by far the biggest gainer in Mexico's benchmark IPC index.
The worst-performing stock in Mexico, down almost 90%, was No. 3 retailer Controladora Commercial Mexicana SAB, which sought bankruptcy protection after posting a loss of $2.5 billion in currency trades.
Mexico's IPC index fell 39.8% in dollar terms, after the 11% rise of 2007.
In Brazil, only 10 of the 66 shares comprising the Bovespa index advanced. The worst performer among index members was housing developer Rossi Residencial SA, down 83% as a local housing boom stalled.
The region now faces its sharpest downturn in economic growth since 1983, according to Morgan Stanley chief Latin America economist Gray Newman. In December, Morgan Stanley began predicting that Latin America's economic output would contract 0.4% in 2009, led by reversals in Mexico and Argentina.
Economic growth in Mexico slowed sharply in 2008, to an estimated 1.8% from 3.2% a year earlier. Analysts expect economic contraction and weak stock performance in 2009, as Mexico's economy historically lags behind the U.S. by about six months.
Brazil was hit by a sharp devaluation of the real, while falling commodity prices decimated shares of steel, oil and minerals companies. Iron miner Cia. Vale do Rio Doce fell more than 60% from its peak in June as demand from Chinese steelmakers ebbed.
Brazil's gross domestic product rose 5.5%, but economic growth slowed in the last quarter. Auto makers shuttered assembly lines, and a historic expansion in consumer credit showed signs of slowing. Itaú Holding Financeira SA bought União de Bancos Brasileiros SA, known as Unibanco, forming the South America's largest bank.
José Arturo Tobias, chief equity analyst at Bulltick Capital Markets, a boutique investment bank in Miami focused on the region, says economic uncertainty in the coming year, with early quarters of economic contraction and poor earnings, means investors will focus on individual stocks, not countries or sectors. "Look for repricing of companies that are very depressed now, but which have good margins," he says, citing soda bottlers and brewers, or natural monopolies like airport operators or telecommunications companies with consistent cash flow.
Latin America's populist governments could face deepening troubles in 2009. In Venezuela, economic output and government revenue slowed sharply when oil prices fell, as oil accounts for 90% of exports. President Hugo Chávez is expected to devalue Venezuela's currency 30% to 40% in order to maintain domestic spending programs, according to Bulltick Capital Markets.
Argentina also embarked on market-unfriendly moves, boosting government revenue by taking control of private pension funds and raising taxes on agricultural exports. Protesting farmers blocked highways throughout the year. Argentinians began withdrawing money from private bank accounts, fearing government seizure.
Despite stock-market losses, Latin America claimed an important victory as countries avoided the economic meltdowns that have accompanied past economic crises. While the region may enter recession along with other regions of the globe, it has largely avoided massive currencies devaluations, government debt defaults and loss of investor confidence. This time, central banks reacted to crisis by raising interest rates on inflation concerns and tapping record dollar reserves to manage exchange rates.
Only one country, Ecuador, defaulted on its international debt. But both Brazil and Peru gained investment-grade status for their sovereign debt. Peru should repeat as the region's fastest growing economy, though growth is expected to slip to 5% from 10%. The general index of the Lima stock exchange fell 61.5% in dollar terms.
—Joanna Slater contributed to this article.