According to Morgan Stanley’s recent LatAm research, here is what investors must avoid in 2012:
At the country level, we would avoid Mexico due to rich (especially relative to EM) valuations and weak growth prospects with downside bias.
In Brazil, we’d avoid commodity producers and capital users. Our Underweights are financial services (competitive landscape), steel (low profitability), homebuilders (negative cash flow) and beverages (valuations).
In Mexico, we shy away from industries with rich valuations and high leverage: retail, industrials, and homebuilders.
Now here is the funny part: this same bank suggested Banco do Brasil and Vale as part of their “top ten LatAm stock ideas“, which are exactly what they suggest “avoiding” (commodities and financials). Non-sense.
Anyway, here is what they like:
In Brazil, we prefer domestic sectors over commodities. Our Overweights are in defensive industries such as shopping malls and utilities (inflation protection), wireline (dividend yield), and petchem/fuel distribution (earnings visibility).