Lockdown in Latin America in play: the main names of stocks and bonds that Credicorp supports
Latin American markets have been hit hard by the coronavirus crash, but the crisis has also created exciting opportunities to grab some of the region’s quality businesses at discount prices.
In Credicorp Capital Asset Management’s latest market report, Peruvian firm’s purchasing research manager Darío Valdizán said responses to the pandemic have been varied across Latin America, Peru, l ‘Argentina and Ecuador being the fastest to take action and initiate blockages.
While the Brazilian government has not been assertive in its response, luckily its regional government has been proactive. But the slowest to respond has been Mexico, with its economy also one of the hardest hit due to the collapse in the price of oil.
“Although it is too early to estimate the repercussions of the lockdowns on Latin American economies and the effectiveness of their government’s policy initiatives, we remain very constructive with the long-term outlook,” wrote Valdizán.
“We recognize that uncertainty remains high and we expect downgrades to materialize for Colombia and Mexico in the medium term. We also believe that current valuations, in some cases at 2008 levels, have created an attractive margin of safety for long-term investors. ‘
Valdizán said his team expects Colombia and Mexico to lose their investment ratings due to the stock market crash, with companies in the banking, oil and gas, utilities and infrastructure sectors most at risk. .
Within the region’s fixed income market, Valdizán said there are a number of opportunities in a number of risky sectors.
“We find value in Industria Penoles in Mexico – PENOMX’49, worst-case return (YTW) of 5.88% – and in Brazilian mining companies like Vale (VALE’34, YTW 5.30%)”, said writes Valdizán.
“While in Peru we like financial services like Intercorp Financial Services (IFS´27, YTW 5.60%) and in Chile we find value in public services like AES Gener (AESGEN´29, YTW 5 , 16%) and consumer staples like Cencosud (CENSUD´45, YTW 6.30%). ‘
Although the Latin American corporate high yield performed less well than its emerging market and US counterparts during the March correction with a performance of -17.66% versus -13.85% for the emerging markets high yield and -11.46% for US high yield, Valdizán said they would only expect the default rate to reach more than 5.5% in Latin American high yield corporate bonds.
He added that his team has also found value in bond issuers such as beverage company Ajegroup, Brazilian Itau Unibanco and iron and steel maker Companhia Siderurgica Nacional, and Mexican industrial company Cydsa.
Regarding the region’s stock market, Valdizán said he has added high-quality companies whose valuations have fallen significantly since the start of the year (YTD), such as cyclical stocks exposed to China and goods. basic consumption. His team has also focused on businesses whose services are in demand during the lockdown, such as telecommunications, technology, consumer staples and healthcare.
“Bradesco (-45.8% year-to-date), our top pick in finance, and Lojas Americanas are two names that fit the profile of a quality company,” wrote Valdizán.
“Bradesco has a strong balance sheet (coverage ratio greater than 200%), a diversified portfolio with limited exposure to riskier segments and a solid track record of profitability in challenging environments. While Lojas Americanas (-9.4% year-to-date) is the leading retailer in Brazil with a national presence, a multi-channel proposition (58% of its gross merchandise value is online). ‘
Valdizán said his team had also spotted stocks in some cyclical names that had been “over-punished” during the stock market crash, such as Brazilian oil giant Petrobras, whose valuation has fallen 64.5% since the start of the market. year, as well as the mining giant Vale (-41.9% YTD) and Copa Airlines (-53.5% YTD).
‘[Copa Airlines] is the airline best positioned to overcome these turbulences, as it relies on a set of inimitable competitive advantages: location of the hub, operational figures, financial strength and healthy margins, Copa is in a class of its own as one of the world’s best-run airlines, ‘wrote Valdizan.
‘Finally, we recently added Kimberly-Clark from Mexico (-10.7% YTD) to our portfolio. A quality defensive game, which doubly benefits from the current context.
“First of all, it occupies a leading position in all of its resilient product mixes focused on basic needs categories (diapers, tissues, soaps, etc.). Second, around 32% of its cost structure comes from petroleum derivatives, which have seen a sharp decline. More importantly, it has consistently delivered strong margins reflected in an average return on capital of around 20% over the past five years and is well balanced. ‘