SAO PAULO Stocks related to domestic consumption will likely outshine shares of commodity producers over the next 12 months in Latin America, a Reuters poll of fund managers showed on Tuesday.
With a shaky global outlook casting doubt on profits of steelmakers and iron ore producers, the poll suggested investors are looking into opportunities in companies with greater exposure to the region's booming middle-class.
The poll of 34 fund managers region wide, who oversee a total of over $250 billion in assets, also showed fast-growing Peru as a top destination for investments, alongside Mexico and Brazil.
The managers based in Latin America's five largest economies - Brazil, Colombia, Mexico, Chile and Argentina - were asked to choose the three sectors which will tend to present the best and the worst performances over the next 12 months.
Fifty-nine percent of them mentioned the consumer sector as one of the best likely performers, while 41 percent picked the financial sector and 38 percent singled out shares of transportation and logistics companies.
A similar poll conducted six months ago with fund managers across the globe also showed a clear preference for consumer stocks in Latin America, but by a lower margin - just less than half mentioned them among their most preferred stocks.
Commodity producers, saddled by weak global demand and shrinking profit margins, were most cited as the worst likely performers. Fifty percent singled out shares of miners and steelmakers as the worst performing class, 44 percent mentioned oil, gas and petrochemicals producers, and 38 percent brought up utilities companies such as electricity generators and distributors and sanitation firms.
Companies like Brazil's biggest diversified retailer Grupo Pao de Acucar SA (PCAR3.SA), Wal-Mart de Mexico WALMEXV.MX and Brazilian cosmetic producer Natura (NATU3.SA) have posted double-digit profit growth in the third-quarter, reaping benefits from the over 50 million people who rose out of poverty in the past decade, according to the World Bank.
"This trend will remain in place over the next years," said David Kaddoum, partner at Brazil-based Atmos Capital, which has 650 million reais ($309 million) in assets under management.
"Consumer stocks look expensive in Brazil now, but this is also a sector in which government interference has been much more positive than negative," Kaddoum added.
Political risk is an issue dragging down other sectors, especially in Brazil, where President Dilma Rousseff has been aggressively trying to boost economic growth and revive investments. Brazil's IEE index .IEE of electrical utility stocks has lost nearly a quarter of its value since mid-August, for example, as the government pushes companies to accept steep power tariff cuts.
Government intervention is also hanging over commodity producers such as Brazilian mining giant Vale (VALE5.SA) and state-owned Petrobras (PETR4.SA), two of the three largest Latin American listed companies by market value.
But the main worry over commodity shares is their close link to a feeble global growth outlook, even as China's economy has started to show signs of a recovery, analysts said. The 19-commodity Thomson Reuters-Jefferies CRB index .TRJCRB, for example, has fallen over 7 percent since a peak in late February.
LOVE PERU, AVOID ARGENTINA
There was a slight preference among investors on which country is the best to invest in, with 71 percent mentioning Peru, 59 percent picking Mexico and 56 percent of them bringing up Brazil. Chile and Colombia were also well ranked, with fund managers praising the strong fundamentals of these five countries - all with the coveted investment-grade status by Fitch, Standard & Poor's and Moody's ratings agencies.
"(Some of) these countries have shown some positive signs or presented solutions on fiscal, pension and political reforms, as well as investments in infrastructure and education," said Monica Oliveira, fund manager with Brazil-based Brookfield Gestao de Ativos. "There's a commitment with price stability and sustained economic growth."
Investors were asked to name the three best and the three worst countries in which to invest in Latin America.
Despite Peru's top ranking, a fund manager at one of Latin America's largest banks complained about the "lack of deepness" in the country's financial markets.
"Peru's macroeconomical fundamentals are spectacular, but there aren't enough financial vehicles to take benefit of it," said the fund manager, who asked not to be named.
A wide majority of the fund managers polled, 91 percent of them, mentioned Argentina as one of the three worst countries to invest in. The region's third largest economy averted a technical default last month after President Cristina Fernandez appealed against a U.S. court decision to pay $1.33 billion to investors who rejected a debt restructuring.
A separate poll published on Monday suggested stocks are poised to gain worldwide as investors become less concerned about fiscal woes in the United States and Europe. Global investors increased their equity overweight positions to a 20-month high in November, according to the poll.
(Additional reporting by Nelson Bocanegra in Bogota, Juliana Castilla in Buenos Aires, Noe Torres in Mexico City and Moises Avila in Santiago; Editing by Tim Dobbyn)