América Latina. A visão dos investidores

That, in a nutshell, is the advice of Jay Garcia, managing director of Latin American equity research at Samuel A. Ramirez & Co., an investment bank based in New York.

But Garcia's optimism is not confined to Mexico. In case you haven't noticed, Latin America is booming, a startling development in a region that has stagnated in recent years, when it wasn't imploding. Latin America delivered phenomenal returns in 2003, boasting five of the top 10 equity markets in the world, according to LatinFinance magazine. Brazil was the outstanding play in the region, returning an astonishing 140% during the year. Garcia is telling investors Mexico is the next star.

"We're advising people to buy blue chips in Mexico across the board," says Garcia, who forecasts 4% GDP growth for the country in 2004.

So what happened in Latin America to account for such a dramatic turnaround? A lot, according to Garcia. Interest rates have fallen, inflation is no longer a problem and currencies such as the peso are more fairly valued now that they're no longer pegged to the dollar, says the fund manager. Also, rising demand from China is driving up the prices of raw materials, which has helped companies such as Braskem, a Brazilian petrochemicals producer.

SmartMoney.com asked Garcia to sketch the Latin American investing landscape, highlighting opportunities and pitfalls.

SmartMoney.com: A lot of people, when they think of Latin American economies, think of devalued currencies, social unrest and shaky governments. Are you saying it's time to reevaluate the region?

Jay Garcia: Yes. We've been following the region for 16 years and have gone through all the crises. Now, the cycle looks a little different. In the past, there has been a lot of economic volatility in these currencies, whether with the currency, inflation or interest rates. Now there seems to be some stability in the macroeconomic scenario. You have inflation at bay, interest rates at fairly low levels. The currencies are floating or aren't pegged to the dollar, with a couple exceptions. That basically means there's no trigger or variable that investors should be worried about with the currency. When Argentina and Brazil were pegged, you always expected that that was going to have to end at some point, and that was a worry for investors. So there won't be that mass devaluation that has hit the region so many times. It's a growing region, it's going to grow 4.5% this year, and we believe those levels are going to be sustainable for the next few years.

SM: Argentina has been a basket case recently, dragging down the economies of the entire region after it devalued the peso. But it is growing now. What's changed?

JG: The peso being linked to the dollar made the Argentine economy a bubble. So they had to rely on the International Monetary Fund and other external sources for capital after the devaluation. When they devalued the peso, the flows of funds into the country left, which left a cash economy. There really is no banking system there. The economy is still in trouble, but it is recuperating. Basically what's changed is that after the devaluation, Argentine products are becoming more competitive, which wasn't the case before, and they've started to export to Europe and the U.S. Slowly but surely it's getting healthier.

SM: There have been fears that Argentina would default on its payment to the IMF, which would undermine faith in its economic recovery. Is this all just politicking and grandstanding by Argentine President Néstor Kirchner?

JG: Yes, it is. The president has to save face. They'll continue to pay the debt as much as they can, but they want to do it on their own terms. You can't expect the Argentines to pay back all the money at once — that would bankrupt the country. That's something that none of the parties want. So I think what Kirchner is doing is sound and is in the best interest of the Argentine people.

SM: Aren't power-supply shortages knocking down GDP growth in Argentina?

JG: Yes, but it's nothing major. The temperatures have recently been higher than historical levels, so they started consuming more energy, especially oil and gas. They started to say that they need to do something about this before it becomes a crisis and they made some adjustments. I don't think it's a big issue.

SM: Inflation is expected to hit 8% in Argentina this year. Any fears of an inflationary spike?

JG: I don't think so. Right now, the currency doesn't need to be defended. The interest environment isn't a concern. In fact, inflation isn't a concern across Latin America, which is a big change, because 20 years ago that was the biggest issue in Latin American, when inflation was all over the place.

SM: You say Brazil is more attractive than Argentina. But Brazil isn't growing as fast as Argentina is.

JG: Argentina is growing faster, but off a lower base. Brazil is a much more mature economy. It has several sectors that are very strong. The commodities sector has been doing extremely well there. China in particular is driving that. You have very good companies like Petrobras  that are leaders in their industry, and Brazil has really benefited from the higher prices of commodities. That's driven other sectors into high growth and performance. Last year, Brazil was the third or fourth country in the world on its stock exchange with a 140% return. The only concern we have on the economic side with Brazil is that interest rates aren't coming down as much as we would like them to.

SM: It would be unreasonable for investors to think that they could get another 140% return in Brazil. What's your forecast for the Brazilian stock market in 2004?

JG: From the beginning of the year, what we told investors was that there was going to be a shift of more money going into Mexico than Brazil. So the way you play Brazil really is through picking very specific companies that are going to do very well. We had a price target for the stock exchange of 25,000. It almost hit 25,000 in the second week in January, but it's come down a little off that now. In terms of where you put your money, we're advising people to buy blue chips in Mexico across the board and be very stock-specific in Brazil.

SM: Mexico's politicians are gridlocked in their reform efforts as President Vicente Fox's proposals languish in Congress. Do you think the politicians there will be able to get over their partisan brinksmanship?

JG: I can't tell you that they'll figure it out. The country just came out of 61 years of rule by the PRI [Institutional Revolutionary Party], so it's very difficult to change things overnight. Having said that, with Nafta in place and with the U.S. more entrenched, the Mexican politicians have more incentive to move forward. But as we saw at the end of the year, the tax-reform bill wasn't passed, and that was a major disappointment. Tax collection is a problem throughout Latin America.

But still, the Mexican economy continues to grow. We expect it to grow around 4% this year, which is how much it grew in 2003. The sectors that play domestic demand such as beverages should do very well. And the commodity companies are playing quite well. So across the board, we think Mexico is doing quite well. The flow of funds into Mexico continues to grow. It also hasn't gone up as much as Brazil has, so it isn't so rich.

SM: Mexico is suffering from a credit crunch, and regulators are pushing the banks to step up lending. Will that have much impact if they succeed?

JG: Most definitely. Especially in a country like Mexico where about 70% of the population doesn't bank. The push from the government to start lending to middle-class people and small businesses will have a direct impact on the economy.

SM: A lot of people are gun-shy over Venezuela because of the presidency of Hugo Chavez, a socialist who's supported by Castro. Are their fears legitimate?

JG: Yes, but we do see opportunity there. You always see opportunities in good environments and bad environments. Now, we're not recommending that people jump into Venezuela, but there are several companies that we think will do well. In particular, CANTV  is an outstanding story. These guys are paying dividends of almost $2 a year. It's the major telecom company in Venezuela, and we think it's a great takeover candidate. But as far as the general investor goes, I wouldn't recommend investing in Venezuela at this point.

SM: Are there any companies in Latin America that you're especially bullish on?

JG: There's a company called Braskem. It's based in Brazil, and it's the largest petrochemical company in the region. Because of the price of petrochemicals, which is largely being driven by demand in China, the company has improved its debt profile dramatically. It's very well positioned to grow. Its price target for us is 50% up from current levels. So we do like this company very much, and we're recommending that our investors put money there.