Latin America still suffers debt defaults, endemic corruption and awful public and private governance. But, as snap judgments on Latin America go, does such a facile stereotype still hold true in 2005? Or are promises to tear out economic corruption from the roots – whether they come from Brazilian President Luiz Inacio Lula da Silva or Mexican President Vicente Fox – really translating into better Latin American business practice and IR?
Victor Bulmer-Thomas, director of Chatham House, an international analysis center based in London, says Latin American governance progress is now visible on several fronts. ‘On the plus side, you have a number of big companies with foreign participation, either with direct investment or minority shareholdings, which leads to better transparency and seats on the board,’ he points out. ‘At the top end of the scale, companies with ADR listings in New York have to do things properly. Most companies in Latin America, however, are not listed, tend to be family-managed, and are not run according to stock market requirements.’
Typically this means smaller companies have no real incentive to improve governance reporting. Most firms needing capital draw on their own resources or use personal contacts through the extended family network. ‘Very few actually go outside onto international markets,’ says Bulmer-Thomas. This is reflected in patchy stock market representation. There are only two major stock markets in the region, one in Mexico City, the other in São Paulo, and many companies that are listed aren’t actively traded, so liquidity is often poor.
Breakaway pack
For the larger companies that have to communicate with public investors, however, the picture is improving, according to Dean Newman, fund manager of Invesco Perpetual’s Latin American Fund. ‘In many ways, IR in Latin America is not that different,’ he says. ‘Generally, access to Latin companies in the UK is good: they travel and there’s a good array of conferences here and abroad.’
The quality of roadshows organized by brokers, however, is often imprecise. ‘Many are so desperate to take companies on roadshows,’ Newman continues. ‘Companies really need to have a very clear view on why they should use a certain broker over another. If they’re using the right broker, it can really benefit the company.’
But even if you don’t buy or own, says Newman, seeing Latin American companies regularly – roughly every nine months – means you can build a picture and ‘see how the strategy evolves and how straight they are. Some can see the way the world is going, and they’re saying, Let’s be exemplars, understanding and talking shareholder value.’
Where Latin America can be markedly different from other markets is the troubled issue of company ownership and control, warns Dr Mark Mobius of Franklin Templeton Investments. ‘There can be a tendency for companies to be controlled by a small number of shares and these are the issues [their] IR people tend to skirt around, or provide excuses about,’ he says. Voting issues, especially minority rights, remain a problem some Latin American governments seem reluctant to rectify, ‘or may even aid and abet,’ according to Mobius. ‘Brazil is the biggest offender.’
Voting rights are critical because some Latin American companies still issue preference shares, which carry no voting rights, rather than ordinary shares. This means the real control can remain with family members of a company, even if they personally hold little stock.
Nevertheless, Jules Mort, fund manger of Threadneedle’s Latin America Growth Fund, says Latin American governance is a much improved beast, compared with the past. Look no further than Brazil’s Novo Mercado, Mort adds, a secondary stock exchange where companies must adopt western-style governance standards to be listed. ‘I won’t meet a new firm that is not preparing to list on the Novo Mercado,’ he states.
Mort says most companies on Brazil’s Novo Mercado now also offer 100 percent tag-along rights to shareholders, allowing them to receive the same price for their stock in any merger or takeover that a controlling shareholder would receive. This hasn’t always been the case. Two years ago the brewer Ambev was taken over by Interbrew, which bought controlling shares in the Brazilian company. ‘It was an unfavorable transaction for minority shareholders,’ recalls Mort. ‘Interbrew used Ambev’s non-voting shares to buy some Interbrew assets at what we considered to be a very high multiple, which meant the controlling shareholders benefited disproportionately.’
On the broader IRO front, however, Mort is optimistic. ‘Typically, Latin American IROs are well prepared, know their companies well, and understand the concerns foreign investors have,’ he says. ‘They tend to be well educated and fluent in English, often with MBA backgrounds. Compared with some Asian companies, they’re often a lot more sophisticated.’
The positive IR news flow continues from Dariusz Sliwinski, a global emerging markets fund manager from Martin Currie Investment Management in Edinburgh. ‘Yes, there are [Latin American IR] bad guys who give information only when you request it, and it can be pretty convoluted,’ he says. ‘But it is much better than you would expect from some of the ownership structures. You can always call them. Even state-controlled disclosure is fantastic and timely, and some companies will tell you more than you need to know.’
Governance cracks
That seems to depend on who you talk to, however. Karina Litvack, head of governance and socially responsible investment (SRI) at Foreign & Colonial Asset Management, says some Brazilian companies can still be conveniently hazy about board directors, not even bothering to supply their names, let alone biographies.
‘In effect, we can be asked to rubber-stamp the board when it is supposed to be protecting our interests – that is a governance red flag to us,’ Litvack says. ‘We also have concerns about the effectiveness of audit committees. It’s quite common to see related-party transactions, so you have to have a strong independent audit committee to make sure any transactions are being done at arm’s length in Mexico and Brazil.’
While Brazilian companies are required to have audit committees to list, the terms set in law are too weak, adds Litvak. ‘In Brazil you can get a carve-up situation with just three members on an audit committee, the first being voted in by the controlling shareholder, the second by preferred minority shareholders, and the third named by a combination of the two,’ she explains. ‘In principle, though, the audit committee should be 100 percent independent.’
Other cracks relate to the Latin American region still being very dependent on the health of the US economy, points out Ryan Hughes, investment manager at Chartwell Investment Management. ‘What we’ve been seeing is American companies that might have outsourced to the Far East now outsourcing to Latin America in the same way much of Europe outsources to eastern Europe,’ he says. ‘But this shift is also a weakness: when the US economy does poorly, much of the South American region also starts to underperform. It’s very North America-focused.’
This is true for near neighbor Mexico, but some say it’s not quite the same for Brazil, substantially further south, which is modestly increasing its exports and upping infrastructure investment under left-of-center President Lula da Silva.
Bulmer-Thomas says the region, be it Mexico, Brazil or Chile, is increasingly seeing improved political leadership, especially when it comes to tackling corruption, a common Latin American investor complaint. ‘The whole issue of corruption, both public and private, is now taken far more seriously than in the past and has also become an electoral issue,’ he notes. ‘Behavior that in the past might have been laughed off or ignored is much less tolerated, and that means businessmen with political ambitions are avoiding political scandals. The climate has changed dramatically.’
Great news, to be sure, but Mobius, an adroit veteran hooter a few hard bursts, just in case of complacency. ‘If you look back, Venezuela had great prospects; Argentina also,’ he points out. ‘Brazil has shown signs of reform and Mexico is also gradually improving. But it’s still a very mixed picture.’
Are investors ignoring Latin America at their peril?
China and India have been the two countries on most people’s lips when discussing emerging markets in the last two years. But have investors missed out by ignoring Latin America? Hilary Cook of Barclays Stockbrokers remains cautious, but acknowledges there are opportunities to be had.
‘Most people, when they talk about emerging markets, tend to say you need a good slug in India, China or both,’ she says. ‘We concentrate on Asia so much that [South America] doesn’t feature. But [Latin Americans] do seem to have stopped being basket cases and are addressing reform issues.’
This is reflected in fund performance over the last year. Foreign & Colonial’s Latin American Investment Trust is up a huge 74.3 percent, with Scottish Widows’ Latin American Fund not far behind at 55.2 percent.
Investment bank Morgan Stanley supports a continuing strong Latin American investment story, fueled by possible interest rate falls and congenial valuations. ‘By the final quarter of 2005 there will be a broad consensus on local interest rates falling,’ predicts Morgan Stanley analyst Mario Epelbaum.
But, despite Mexico’s strong recent performance, Epelbaum says it’s no longer quite the deal it was. ‘At a forward consensus P/E of 12.1, Mexico’s valuation is approaching levels in which the market historically faces resistance,’ he notes. ‘Mexico trades at a 17 percent discount to the S&P, [but] when adjusted for sector weightings that discount shrinks to 7 percent – no longer a bargain.’
Others aren’t as generally bullish for the region. The Brazilian real and Mexican peso are considered overvalued by some, and could weaken further. Presidential elections are due in Brazil, Mexico, Chile and Colombia, and no market likes political uncertainty, especially when it hails from Latin America.
