Latin American markets still growing in a healthy manner – A. Djordjalian (GFA, BAP, XPL)

Andy DjordjalianAuthor: Andy Djordjalian

Covestor Model: South America

Disclosure: Long XPL, BAP, GFA

This is my first report since March. Sorry about the delay. I hope that, as a replacement for the missing reports, you had the chance to read the rationale for my purchase of Gafisa (NYSE: GFA) that Frank Voisin kindly published on the Covestor blog a few weeks ago.

During this three-month lapse, Latin American markets experienced a recovery, but then fell back to previous levels, as can be seen on the graph of the Dow Jones Latin America index (^A3DOW) (see below) that Covestor now uses as a benchmark for this model. By the way, I think it was a great improvement to add this regional benchmark because it contextualizes this portfolio’s results – like I intended to do on my past monthly reports when I compared with funds that invest in the region, but with better visibility and timeliness.

^A3DOW Chart from, 6/13


Though South American equities, and emerging markets in general, have not performed well compared to U.S. equities so far in 2011, these economies are growing in a healthy manner and I remain comfortable holding the stocks in this portfolio. Emerging economies are facing challenges, like controlling inflation and other factors that I commented on in my March report, but I believe that most of these issues are transitory and that the prospects for stocks from these regions compare well to other regions.

Some prominent investors seem to agree, like David Swensen, who in 1Q11 almost doubled his position in the ETF iShares MSCI Emerging Market Income (NYSE: EMM) for the famed Yale Endowment Fund he manages. Swensen now allocates around half of that fund’s total portfolio to emerging markets, according to Guru Focus.

My outlook for the global economy has a significant dose of uncertainty. There are many unsolved issues, such as the future of the real estate industry in the developed economies. This sector has been at the heart of the problem since before the 2008 meltdown and it remains there.

Another open question is the solvency of the European periphery, the so-called PIIGS (Portugal, Ireland, Italy, Greece and Spain). Unlike the US, which used monetary relaxation to attain some degree of recovery, the EU authorities insist on a stringent view that I believe is wrong. Among the battery of measures that the PIIGS require to stand up again, I see a need for monetary expansion of the euro zone, so that output in those peripheral countries may be  sustained despite fiscal austerity and consumer concerns. Without this element, if only deficit reduction and debt rescheduling are employed, the PIIGS will probably slow down, which would decrease their tax revenue and make it difficult for them to achieve solvency.

If the European Central Bank (ECB) does ease up monetarily, I believe it would be positive for South America, because one of the sources of Brazil’s economic challenges is the weakening of the European demand for its industrial exports. The European Union would make the move mainly to try to create more demand on their own periphery, but that demand would also favor other historical suppliers like Brazil. It would, however, prolong the emerging world’s fight against inflation. Nevertheless, the situation is still uncertain and very politicized, so I am not counting on such a move in the short term. On the contrary, current sentiment is that the ECB will raise rates to keep inflation within targets.

I am evidently not the only one with an uncertain outlook, but that does not leave me with any particular confidence in holding currency or treasuries. Take the recent past as an example. A year ago, the situation was even more uncertain; still, the S&P 500 has risen substantially since then. If an investor in the large-cap US market sold his stocks a year ago to wait for the fog to clear, that resulted in significant missed opportunity. Currency and treasuries still do not show much appeal nowadays; despite the uncertainty, I believe emerging markets are a good option.

On a different note, there is currently an electoral process in Peru, the fastest-growing country in South America. The first round was held in April. I was disappointed to see three presidential candidates who I believed had the qualities to become very good presidents – namely Kuczynski, Toledo and Castañeda – finish in the third to fifth positions. The second round will be held on June 5 between those who won the first: nationalist Ollanta Humala and Keiko Fujimori. Keiko is the daughter of Alberto Fujimori, a controversial former president who is in prison for human rights violations and corruption. I have a feeling that she will win, but the latest polls as of this writing showed no statistically-significant advantage for either candidate, so there are no real certainties. I will not enjoy seeing a Fujimori back in the presidency, especially if she grants a presidential pardon to her father, but I would not be surprised if she offers a decent mandate given the chance. Alberto Fujimori’s questionable acts happened in a very different context, a war against terrorist organization Sendero Luminoso, which were practically defeated during his administration, and he did not work with a congress as mature and diverse as the one Keiko will face if she wins. Besides, his team planted the seeds for economic growth. On the other side, I find Humala’s discourse to be fickle and superficial, with a pinch of authoritarianism. Some have asked if he may become the Peruvian Lula, in reference to the popular former president of Brazil, but I do not see in Humala the qualities that Lula showed before becoming president. Nevertheless, given the opposing congress and the opportunity offered to Peru if it abides to the right rules, I do not believe Humala or Keiko can spoil the Andean country’s future.

Peru is in my portfolio mostly through my positions in Credicorp (NYSE: BAP), the country’s largest financial holding and owners of its largest bank, and through Solitario Exploration and Royalty (AMEX: XPL), which has an interesting zinc-mining project there. I have kept the size of these positions limited because of this electoral story

Peruvian stocks have been weak in 2011, probably for the same reason. I think the markets have incorporated the recent political developments fairly well into prices. That is why I didn’t trade more, but I will keep on monitoring the news to see if a window of opportunity – or what I believe to be so –  opens up.

I wish you a pleasant and fruitful June, thank you for your interest.


“Why I added Brazilian homebuilder Gafisa SA to my portfolio” – Andy Djordjalian, Covestor Blog,  May 13, 2011

“Yale Endowment Fund Loads Up EEM” Guru Focus, May 13, 2011

^A3DOW chart from