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With so many natural disasters and financial and political near misses, many investors thought Latin America was down for the count. Yet, at least the larger countries in the region, Brazil and Mexico, appear to have deftly played rope-a-dope.

Now they're making their comeback.

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Recent Performance in Latin America Looks Promising

It's been a tough slog. Latin America suffered through a devaluation in Brazil, a bond default in Ecuador and three interest-rate hikes in the U.S. -- the overwhelming economy of the Americas over the past year. The string of difficulties triggered an inevitable wave of investor and lender pessimism. Investors took their dollars elsewhere and lenders pulled tight the purse strings.

The prices of Latin American assets are now so low, says Jane Heap, vice president of Latin American equities at Deutsche Bank, that the region is the cheapest among emerging markets when compared to its fundamentals. For example, the average price-to-book ratio of Latin American equities is 1.6, compared with Asia's average of 2.1, according to the International Finance Corp., a division of the World Bank.

Latin America
After going south, things are starting to look up, especially in Brazil and Mexico.

That situation may not last for long. Commodity prices are rising, money is returning to the capital markets, global growth is spurring demand for regional exports and international investors are regaining an appetite for risk.

Already, Latin America has been a good bet over the past year . And over the course of the first half of 2000, money is expected to flow to the larger, more liquid markets such as Brazil and Mexico, where investors can find blue-chip equity plays, according to Latin America analysts. Telecommunications issues, which are already popular in developed countries, will likely benefit from renewed interest. Industry leaders such as Brazilian Telebras ( RTB) and Telefonos de Mexico ( TMX) are likely to attract much of the investment capital.

Join the discussion on TSC Message Boards . Given how dire the situation seemed a mere year ago, Brazil's economic turnaround is perhaps the most surprising development. Back then, banking officials resigned, cursing the central bankers who devalued the real, Brazil's currency. Now, analysts say the devaluation was a salubrious event, spurring exports and bringing with it a rise in export-oriented earnings and liquidity in Brazil. An indication of the renewed confidence in the country: The benchmark Bovespa stock index is up 152% since the beginning of 1999, handily besting the S&P 500's 19.5% rise over the same period.

Brazil and Mexico are now the belles of the ball. Institutional and mutual fund investors, once wary of Latin American debt, are now touting the deals to be had in key stocks and Brazilian Brady bonds, the U.S. dollar-denominated bonds backed by U.S. Treasury bonds and issued by emerging markets. Spreads in most Latin American Brady bonds are expected to tighten with a regional recovery, and the Brazil Capitalization Bond, the Brazilian benchmark that is also known as the "C," has been showing more strength lately while still offering a yield of 12.79%.

Latin American equities are also coming back into favor. While Deutsche's Heap prefers fixed-line telecoms, Salomon Smith Barney's emerging markets team recommends Telesp Celular Participacoes S.A. ( TCP), the primary cellular service provider and one of the companies formed after the restructuring of Telebras.

Mexico is an equally strong story: Its geographic proximity to, and special trading relationship with, the U.S. make it particularly attractive. The robust U.S. economy has pulled up Mexico, particularly the maquiladora border assembly plant sector and oil exports, as Americans consume more oil and more products pieced together at those plants. And the fear of a disruptive national election next July has faded with Francisco Labastida's win in the first-ever primary election and the collapse of a formal opposition alliance. The equity market has put in a good show as well, rising 80% since the beginning of 1999.

Moreover, though emerging markets players are split on the issue of possible upgrade, Mexico continues to appeal to crossover buyers who are looking for a better spread without the risks of lower-rated credits. Again, Bradys are the debt instruments favored by investors and managers. Among equity plays, analysts' favorites include media group Grupo Televisa ( TV) and international cement giant Cemex ( CX).

Yet, it is precisely the surging U.S. economy that could stunt the growth not only of Mexico, but also of the region as a whole. A hard U.S. landing would send shock waves throughout international markets and would take away the wealth of disposable income that's returning to riskier markets. The hope among Latin America analysts is for a U.S. soft landing with a rate hike of 25 basis points next year -- enough to ease inflation and yet small enough to not adversely affect the rest of the Americas.

But Latin America's success is not spread evenly throughout the region. Microeconomic and fiscal reforms are still needed across the board. Ecuador still haunts discussions of Brady debt, with few encouraging signs that the Ecuadorian government can climb out of its fiscal hole.

Other uncertainties persist. Upcoming Chilean runoff elections should clarify and distinguish the two candidates' market policies. With the passage of a new constitution that gives him broader powers, the ever-iconoclastic Venezuelan President Hugo Chavez could swing his flood-riven country either toward chaos and further economic decline, or toward greater stability.

On the whole, however, the region is growing without the former tagalong of inflation. With wide spreads and cheap stocks, Latin America may be the best-kept secret of the coming year. "The greater risk for global investors," says Geoffrey Dennis, Latin American analyst at Salomon Smith Barney, "will be sitting out rather than being in the Latin American equity markets."

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As originally published, this story contained an error. Please see Corrections and Clarifications.

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