U.S. stocks have been spinning their wheels all year, slowly sinking in the process. Meanwhile, Latin American stocks continue to cruise at warp speed, rising more than 30% year to date.
Latin America fund investors surely aren't complaining about the outsized returns, but are their expectations getting a bit warped as well?
Don't take your foot off the Latin fund pedal just yet, says Will Landers, portfolio manager for the $239 million (MDLTX) Merrill Lynch Latin America fund. Landers remains bullish on Latin America even if the U.S. economy starts to sag, oil prices fall and interest rates move higher -- a trio of events that has traditionally sunk South American stocks. According to Morningstar, Landers' fund is up 35% this year, after an impressive 43% increase in 2004.
TheStreet.com checked in with Landers to find out why he believes this rally still has room to run, even when U.S. equities seem to be digging themselves into a deeper and deeper hole.Latin American stocks are up well over 30% year to date, even while domestic stocks are starting to sink. How long can they keep it up? We believe that we are only in the middle stages of the recovery for Latin American equities. As a region, the market continues to trade well below historic average multiples. It offers the best value-to-growth combination of all the world's regional markets, emerging or developed. According to the latest fund flows, loads of U.S. investors have been piling into international funds, whether they be Latin American or Asian. Why the big rush out of the U.S. and into foreign markets? The main reason for this large flow into emerging equities is that these regions offer better growth than is expected in the U.S. at significant discounts from a forward P/E standpoint. Furthermore, if you look at Latin America's three largest markets, Mexico and Chile are investment grade and Brazil has reduced its vulnerability to external shocks significantly -- I don't think this reduced risk premium has been fully discounted in equity markets. What will happen to Latin America if the oil rally stalls? Oil is coming down lately and close to 10% of your portfolio is in Petrobras (PBR - Get Report) As long as the oil correction is not very sharp -- and I have a tough time envisioning oil prices falling dramatically -- this correction will have little impact on Latin equity markets. At the country level, Mexico is the most dependent on oil -- roughly 40% of the federal budget stems from oil revenues -- but the budget price is $27 per barrel.