* Major funds were underweight Mexico, had favored Brazil
* Currency movements helped dollar-based investors in Mexico
* Mobius-run fund underperformed; had big Brazil weighting
* Federated's InterContinental Fund had big Mexican bet
By Aaron Pressman
BOSTON, Jan 2 The two biggest financial markets
in Latin America swapped their long-held roles in 2012, with
Mexico surging ahead and Brazil lagging, catching many U.S. fund
investors in the region off guard.
Stocks in Brazil, which had benefited over the past decade
from a fast-growing consumer class and Chinese buying of
commodities, suffered as the government increased regulation of
key sectors of the economy and Asian demand waned. In the third
quarter of 2012, Brazil's economy grew only 0.9 percent from a
year earlier, while Mexican growth was 3.3 percent.
Mexico's fortunes rose partly because of its closer ties to
modest U.S. growth and hopes the new Mexican government will
undertake major reforms that could boost the economy.
"This time last year most folks were quite positive on
Brazil and it was quite a crowded trade," said Adam Kutas,
manager of Fidelity's Latin America fund. "Mexico had
underperformed in the region for eight or 10 years, so it was
The stock market moves were magnified for U.S. investors by
Mexico's strengthening peso and weakness in Brazil's real. In
debt markets, Mexico also outperformed its bigger cousin.
By year end, the MSCI Brazil Index lost 3.5 percent in
dollar terms while the MSCI Mexico index climbed 27.1 percent.
Colombian stocks also posted big gains, rising 31.6 percent,
while Chilean equities lagged, with a 5.6 percent advance.
One of the best-known funds that over-weighted Brazil was
Mark Mobius' $2.3 billion Templeton Developing Markets Trust
, with almost 21 percent of its assets in Brazilian
stocks at the beginning of 2012, its biggest bet on any single
country. Mexican stocks comprised just 1.5 percent of the fund.
It rose 13.1 percent, trailing 83 percent of diversified
emerging market funds, which gained over 18 percent on average,
according to Morningstar. Mobius' big bets on China also
undermined his performance in 2012. [ID: nL4N09T3PI]
Mobius' stock picks from Brazil were a mixed bag as bank
Itau Unibanco Holding lost 9 percent and mining giant
Vale SA gained just 6 percent. But tobacco company
Souza Cruz jumped 38 percent and beverage maker
Companhia de Bebidas das Americas gained 57 percent.
The fund has a three to five-year investment horizon, Mobius
said in an e-mail. "Brazil is an area that we continue to
believe has good long-term potential," he wrote.
The larger Wells Fargo Advantage Emerging Markets Equity
Fund, at more than $3 billion, underperformed. It also
bet big on Brazilian stocks like Petroleo Brasileiro
S.A., which lost 13 percent, and Vale. But another top
pick, Banco Bradesco SA, gained 17 percent.
The fund gained 12.5 percent for the year, trailing 87
percent of its peers, according to Morningstar. Wells Fargo
declined to comment.
Even among funds that specialize in Latin American stocks,
the largest actively managed funds had a rough year and trailed
the category's average 12.3 percent gain, according to data from
Lipper, a unit of Thomson Reuters. Fidelity's $2.3 billion Latin
America fund gained just 4.1 percent, BlackRock's $566
million fund rose 8.7 percent and the $1.7 billion
T.Rowe Price fund added 10.3 percent.
Federated's InterContinental Fund, with stocks in
both developing and developed markets outside the United States,
was one of the big winners in getting Latin America right.
Entering 2012, it had a big bet on Mexican stocks, about 13
percent of the fund, including bank Grupo Financiero Banorte
, beverage group Fomento Economico Mexicano
and broadcaster Grupo Televisa.
Banorte shares doubled, Fomento gained 46 percent and Televisa
16 percent. That helped the fund gain 20.2 percent for the year,
beating 85 percent of similar funds, according to Morningstar.
Now Federated is building its stake in Brazil. "It's a
contrarian call for LatAm watchers to be adding Brazil," said
Geoffrey Pazzanese, one of the fund's co-managers. The country
is spending more on infrastructure projects and should soon show
signs of renewed growth, he said.
Mexican stocks have clearly become more expensive, but
Federated still expects solid returns in 2013. President Enrique
Pena Nieto is expected to bolster the economy by overhauling the
country's tax regime and shaking up state-run oil giant company
Pemex. [ID: nL1E8NB0DM]
Federated still favors Banorte, which could show 25 percent
earnings growth in 2013, P azzanese said. "Mexico is
under-banked," he said. "The potential for growth is strong."
Another favorite is auto parts maker ALFA, one of
the only ways to invest directly in the growing auto sector.
Fidelity manager Kutas said he is sticking with his big bet
on mobile telecommunications growth. The fund's top holding as
of the end of October was Mexican telecom operator America Movil
SAB, which lost 4.3 percent in 2012.
"The sector continues to morph and change from pure
voice-driven providers to something more," Kutas said, though he
sees the play taking time. "Data growth and smart phone adoption
are slow and the average investor may not be patient enough."
SAME CURRENCY STORY
The Brazil-Mexico rivalry also played out in the currency
markets, where Mexico's peso gained on the U.S. dollar and
Brazil's real declined. The dollar gained almost 10 percent on
the real, which traded at around 2.0475 per dollar at the end of
2012. But the dollar lost more than 7 percent to the Mexican
currency, which closed the year at around 12.8747 per dollar.
Demand for pesos increased as investors flocked to Mexico's
relatively higher-yielding debt. The real was hurt as Brazil's
central bank repeatedly cut rates to stimulate the economy.
The moves magnified the difference in returns for U.S.-based
investors. In local currency terms, Mexico's IPC stock index
rose nearly 18 percent, while Brazil's Bovespa
gained just over 7 percent due to a late rally in December.
Aberdeen Asset Management was among those betting on the
peso and Mexican bonds. The firm's Emerging Markets Debt Local
Currency Fund gained 15.9 percent in 2012, and the
peso bet continues into 2013.
"If there is a single favorite country for us, it's Mexico,"
said co-manager Edwin Gutierrez. He, too, cited expected reforms
to boost growth. "The initial signs are hopeful," he said.
Mexico's ample foreign currency reserves and IMF credit line
should also help, said Esteban Velásquez, head of market
analysis for Allianz Fondika in Mexico City. "If we add the fact
that the famous reforms, so needed by this country, are 'round
the corner, we may even see the credit ratings agencies take
another positive look at Mexico."
Colombia's peso gained even more than Mexico's -- almost 9
percent in 2012. Foreign investment, particularly in energy and
mining, returned to Colombia last year as the government pushed
rebels out of large areas of the country.
The currencies of Chile and Peru also did better than
expected. At the onset of 2012, analysts posited that Chile's
peso would gain almost 4 percent. But the peso
strengthened about 8 percent on strong economic growth and firm
prices for its top export, copper.
Peru's currency, the sol gained more than 5 percent
last year to 2.55.
(Reporting by Aaron Pressman with additional reporting by
Gabriel Stargardter, Jean Luis Arce and Lorena Segura in Mexico
City; Guillermo Parra-Bernal and Asher Levine in Sao Paulo;
Anthony Esposito in Santiago; and Terry Wade in Lima.; Editing
by Martin Howell and Dan Grebler)