BlackRock Turns to Chile, Colombia as Brazil Gets More Expensive

(Bloomberg) -- BlackRock’s top money manager for Latin American equities says Brazilian stocks are looking increasingly overvalued, prompting him to seek out new bets in Chile and Colombia.

After the 28% rally for Brazil’s benchmark stock index this year, Ed Kuczma said other bourses in the region that haven’t fared as well recently are becoming more compelling. The run-up in stocks from the region’s biggest economy has pushed the Ibovespa’s price to the equivalent of 15.4 times estimated earnings, the highest valuation in almost three years.

“We remain constructive on the Brazilian equity market in general but find valuations in certain sectors increasingly rich, which leads us to deploy capital in other markets,” Kuczma said an interview from New York, where he oversees BlackRock’s $1.9 billion of Latin American equity funds. “Chile and Colombia are two markets where we have been spending more time looking for opportunities.”

BlackRock is still underweight in Chile, but Kuczma is looking to unwind that bearish wager as he bets the government will be able to placate protesters upset about social-justice issues without imperiling its fiscal position.

The S&P IPSA stock index is down 4.5% this year amid the worst civil unrest in decades and concerns over the outlook for economic growth. Last month, IPSA’s price-to-earnings ratio hit the lowest level in about 10 years.

“In Chile we have added to pulp and paper stocks as the Chilean peso was oversold in November and created a tremendous opportunity to add to exporters,” Kuczma said.

Colombia’s benchmark Colcap index has gained 23% this year, but has been mostly stuck at its current level since March. While the country deals with a wave of its own street protests, the outlook for the economy is still solid, with forecasts for the fastest growth among its major regional peers in 2019 and 2020. BlackRock has been looking at financials and energy names among Colombian stocks.

Kuczma said he was also seeing opportunities among Argentine tech companies.

“These companies benefit from skilled and competitive programming talent in Argentina” while selling their services in other countries where the economy is doing better, he said.

What to own in Brazil?

BlackRock’s flagship Latin America equity fund has returned 13% this year versus 14.8% for the benchmark MSCI Emerging Markets Latin America index.

Brazil remains the largest overweight for BlackRock’s regional stock funds after the central bank slashed borrowing costs and the government pushed through laws to shore up its fiscal situation. Now, nascent signs of faster economic growth are appearing.

Still, the market’s outperformance this year -- tops in Latin America -- and a more cautious outlook for the Brazilian real as interest rates decline has led the money manager to reduce his exposure to Brazil.

Among Brazilian stocks, BlackRock is still positive on the real-estate and health-care sectors, the latter being one of the largest overweights at the moment.

“As the economy improves and unemployment level comes down, we see opportunity for growth in new members for private health-care providers,” Kuczma said.

Brazil’s privatization of state-controlled firms and further legislative progress on liberalizing the economy will be the next main domestic drivers, according to the money manager.

--With assistance from Ezra Fieser and Eduardo Thomson.

To contact the reporter on this story: Vinícius Andrade in São Paulo at vandrade3@bloomberg.net

To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, Brendan Walsh, Dave Liedtka

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