What Are The Biggest Blockchain And Digital Currency Initiatives In Latin America Right Now?

Latin America: less faith in local currencies

Only 51% of the Latin American (ILF) economy has access to banking services, with political and currency fluctuations repeatedly undermining trust in local currencies. Moreover, increased compliance requirements and costs have caused many traditional financial institutions to exit the market. This phenomenon offers a growth opportunity to automated compliance, blockchain technology innovations, digital currency platforms and cross-border payments systems that help avoid transaction costs.

Blockchain innovation initiatives being taken in Latin America

  • Brazil’s central bank is seeking to investigate possible use cases for blockchain technology and is now moving toward prototyping.
  • Brazilian (EWZ) (CSBR) banks have already trodden the path. Banco Itaú and Banco Bradesco are a part of the R3 consortium. Banco Bradesco is launching pilot projects such as a new digital wallet using blockchain technology in partnership with eWally and Bit.One, to address cross-border payments.
  • Chile’s (ECH) Santiago Exchange and IBM (IBM) have partnered to implement blockchain technology into the country’s financial services sector.
  • Mexico (EWW) based start-up, Bitso secured $2.5 million in funding in early 2017.
  • Mexican venture capital fund, INGIA, invested in Abra, the US blockchain mobile payments startup.
  • In Argentina (ARGT), startups such as Rootcamp provides smart contract solutions for bitcoin technology, while SatoshiTango and Xapo provide bitcoin-based payments solutions.
  • Argentina-based Ripio wants to transform banking on the blockchain with the Ethereum blockchain’s ERC 20 protocol credit network using smart contracts for borrowers, lenders and underwriters.
  • Uruguay is currently experimenting with its own blockchain-based digital currency, according to a statement made by the Banco Central del Uruguay’s (BDC) chief, Mario Bergara.
  • Cryptobuyer, a leading cryptocurrency (ARKW) (ARKK), and digital assets company in the Latin America is the first company ever to install Bitcoin ATMs (BTMs) in a commercial bank (Banistmo Bank’s headquarters).

Asia’s Share of Blockchain Deals Is Booming While North America’s Is Shrinking

Why are blockchain applications practical emerging markets?

The Bitcoin surge has put blockchain or distributed ledger technology on every investor’s radar. While market participants remain divided on the Bitcoin boom continuing or going bust, there are very few contesting the growth and potential of the blockchain technology behind it.

While the United States and Europe dominate the blockchain innovation landscape, the scale for its future growth potential could tilt towards emerging markets (EEM) (VWO).  With higher banking risks and lower banking penetration, developing economies offer the perfect setting for adoption of blockchain-based financial solutions. In fact, blockchain technology is already impacting the provision of financial economies in selected regions of Asia (AAXJ) (VPL), Africa (EZA), and Latin America (ILF).

Asia has emerged as a key player in blockchain technology

Asia has emerged as a key player in this regard (chart above). The region, for its part, brings together regulatory activism, a dynamic technological/fintech ecosystem, the collaboration of industry and entrepreneurial players, and sustained access to venture capital, which is key for any economy that wishes to leapfrog on innovation. Over the years, Asia’s share of global Bitcoin (ARKW) (ARKK) and blockchain deals has risen from 8.5% (2013) to 22.7% (2016), according to data provider CBInsights.com. At the same time, North America’s dominance has reduced from 78.7% to 49.2% over the same period.

Moreover, an increasing number of emerging and frontier (FM) (FRN) market companies are now dominating the Bitcoin and blockchain space (see chart above). Asia especially, with its forward-looking regulatory environments, is steadily emerging as a leader in the testing of, and investment into, blockchain technology.

Leading the blockchain-based solutions for the financial services industry

Asia is currently the leader for emerging markets in blockchain-based solutions for the financial services industry. Markets such as China (FXI) (YINN) and India (EPI) in particular have facilitated the adoption of the technology by massive digitization of payment solutions. Cryptocurrency is already being tested and adapted to facilitate trade finance, and the technology is being levered to improvise on processes such as e-proxy voting, land registry management, and supply chain management.

In the next article we’ll take a quick look at the current state and future potential of blockchain technology in emerging economies such as Asia, Africa, and Latin America.

Amazon Is Quietly Moving Into Brazil — These Are Its 3 Biggest Competitors

Brazil ranks 10th in world retail

The e-commerce industry in Brazil (EWZ) (BRAQ) (BRZU) ranks 10th in the world in size. With a population over 200 million, a large consumer base comprised of an outsized share of millennials, and rising median household incomes, this Latin American (ILF) economy offers the perfect playing field for e-commerce businesses.

Amazon to expand in Brazil

US-based e-commerce platform Amazon (AMZN), the world’s leaders in online retail sales, first set foot in Brazil five years ago. However, its product offering never extended beyond books. This is about to change though. The company is now looking to expand its offerings in the country, which until now had been delayed on account of high taxes and infrastructural setbacks in Brazil.

Over 61 million Brazilians currently shop online, and this figure is forecasted to reach 87.8 million by 2020 (chart above). Retail e-commerce sales in Brazil amounted to $16.58 billion in 2016, and this figure is expected to at least double by 2021. An interesting point here is that about 49% of digital buyers in Brazil made cross-border purchases in 2016, according to PFSweb, Inc. This helps build the case for multinational e-commerce players such as Amazon (AMZN), which are already positioning themselves to tap into this opportunity.

Amazon.com is listed on the NASDAQ GS stock market under the ticker AMZN. The stock is up 29.68% YTD (as of October 26) and boasts a $468.6 billion market capitalization. In financial year 2016, the company reported an ROIC of 7.25%, operated with an EBITDA margin of 9.05%, and a gross margin of 35.09%. EPS growth rate for the company was reported at 290.7%. The company earned a whopping $136 billion in global retail website revenues in 2016.

So, before the mammoth retailer commits to a much-anticipated expansion in Brazil, it is worthwhile to take a quick look at its 3 biggest competitors already cashing in on the Brazil’s massive online consumer base.

The 3 e-retailers in Brazil bracing for an Amazon (AMZN) assault

  1. MercadoLibre (MELI)

MercadoLibre Inc. (MercadoLivre in Portuguese) is Latin America’s leading e-commerce technology company.  The website allows businesses and individuals to list items and conduct sales and purchases online in either a fixed-price or auction format.

Listed on the NASDAQ GS stock market under the ticker MELI, MercadoLibre commands a market capitalization of $10.1 billion and is up 46.7% YTD (as of October 26). The stock currently trades at a P/E of 61.01. Forward P/E (as of 12/17) for MELI is estimated at 84.6. Analysts who reviewed the stock from a buying perspective have rated the stock 3.59/5, comprising 35.3% BUY, 58.8% HOLD, and 5.9% SELL recommendations.

For the 2016 financial year, the company reported an ROIC of 18.72% and operated with an EBITDA margin of 24.88%, and a gross margin of 63.58%. EPS growth rate for the company was reported at 18.9%. The company earned $455 million in revenues from its marketplace business in Brazil in 2016.

  1. B2W Companhia Digital (BZWHF) (BTOW3.SA)

B2W Companhia Digital engages in the e-commerce business through a digital platform in Brazil. The company offers through its website, products including books, CDs, DVDs, IT equipment, electronic equipment, perfumes, and clothing.

Listed on the Brazilian stock market under the ticker BTOW3, the stock commands a market capitalization of $3.1 billion and is up 126.2% YTD (as of October 26). The company’s US-listed ADR, BZWHF is up 151.7% YTD (as of October 26). For the financial year 2016, the company reported an ROIC of 3.48% and operated with an EBITDA margin of 7.6%, and a gross margin of 19.91%. EPS growth rate for the company was reported at 16.6%. The company earned $2.5 billion in revenues from its e-commerce business in 2016.

Analysts who reviewed the stock from a buying perspective have rated the stock 3.13/5, with 25% BUY, 56.3% HOLD, and 18.8% SELL recommendations.

  1. Magazine Luiza (MGLU3.SA)

Magazine Luiza S/A operates a multichannel retail platform of mobile, website, and physical stores. The company offers e-commerce services and retails a wide range of electronics, toys, power tools, and houseware products. Magazine Luiza develops big data, machine learning, and other technologies to remove friction from the retail process.

Listed on the Brazilian stock market under the ticker MGLU3, the stock commands a market capitalization of $3.8 billion and is up 395% YTD (as of October 26). The stock currently trades at a P/E of 54.91. Forward P/E (as of 12/17) for MELI is estimated at 34.66. For the financial year 2016, the company reported an ROIC of 17.02% and operated with an EBITDA margin of 7.13%, and a gross margin of 30.74%. The company earned $2.7 billion in revenues from its retail business in 2016.

Analysts who reviewed the stock from a buying perspective have rated it 4.43/5, with 71.4% BUY, and 28.6% HOLD recommendations.

These Three Frontier Markets Countries Have Already Launched Their Own Cryptocurrencies

Economies are increasingly adopting cryptocurrencies

Bitcoin’s humble beginning in 2009 and its subsequent growth to a $76 billion market cap (as of October 9) bears testimony to the conviction of blockchain technology as a means of payment. Blockchain technology and its product, cryptocurrencies, are gaining acceptance amongst a handful of sovereigns that are now considering the idea of developing their own digital currency. Cryptocurrencies together now command over $150 billion in market capitalization.

There are approximately 50 countries globally (ACWI) (VTI), which currently do not have or do not use their own sovereign currency. This is resulting in some governments beginning to consider the creation of a digital currency of their own. The prospect of decreased transaction costs and ease of ownership make the option increasingly appealing, particularly for use in international transactions.

Presently, there are three frontier markets (FM) (FRN) that are already using digital currencies (ARKW), and a fourth is preparing to do so. Emerging markets (EEM) (VWO) such as China (FXI) and Russia (RSX) are also considering various applications in this regard. Meanwhile, the emirate of Dubai recently launched its own blockchain-based cryptocurrency known as emCash.

Here are the 3 frontier markets that are already using digital currencies, and the fourth which is preparing to join the list:

1. Ecuador

In 2014, Ecuador became the first country in the world with its own digital currency. The small Latin American (ILF) nation is the first to have a state-run electronic payment system known as Sistema de Dinero Electronico. The system allows Ecuadorian residents to pay for public services via their mobile wallets. The scheme intends to help begin to reduce government spending of more than $3 million a year to exchange old notes for new dollars. The 5-year goal for the digital currency is to reach over 4 million users registering around $80 million.

2. Tunisia

Since 2015, Tunisia has been using the universal contracting platform, Monetas, to boost its eDinar (aka Digicash and BitDinar) digital currency using the blockchain. The Monetas platform is an advanced crypto-transaction technology that uses a Blockchain secured digital notary to enable all kinds of financial and legal transactions, public or private, globally. With the La Poste Tunisienne android application powered by Monetas, Tunisians use their smartphones to make instant mobile money transfers, pay for goods and services online and in person, send remittance, pay salaries and bills, and manage official government identification documents.

3. Senegal

In December 2016, this West African country launched its own national digital currency, eCFA, valued at par with the CFA franc. The eCFA was developed by the Banque Regionale de Marches (BRM) and eCurrency Mint and is compatible with other digital cash systems in Africa. The blockchain-based currency has been designed to be compatible with other digital currencies in Africa (EZA). The drive for its very own digital currency perpetuated from the fact that Senegal’s CFA franc is shared by 14 countries in West and Central Africa, and its value is guaranteed by the French government.

Estonia

This European country (VGK) (EZU) is among the most tech-friendly countries in the world. The economy already has an e-Residency programme in place where the government stores its data on the blockchain. Now, the Baltic country is on track to creating its own digital currency, Estcoins, which will be available for use by members of its e-Residency programme. The project is being advised by Ethereum founder, Vitalik Buterin.

These 3 Argentinean Banks Are Set For Big Gains If Macri’s Reforms Begin To Pay Off

Macri’s reforms will drive Argentina’s financial sector

Argentina’s (ARGT) banking system is gradually returning to normalcy after a long history of financial crises. Argentina’s government has undertaken several reformist measures to build investor confidence into the country’s financial markets. These measures are aimed at solving macro stress points including bringing down the country’s double-digit inflation and high fiscal deficit.

President Mauricio Macri’s reforms such as removing capital and trade controls seem to be paying off. Financial activity is picking up in the country, while inflation has been declining steadily. Argentina has finally come out of a recessionary phase as the country recorded GDP growth in the last two quarters of 2016.

Measures related to strengthening policy making institutions, public infrastructure spending, investments in the energy sector and growth in exports have led to Standard & Poor’s upgrade Argentina’s long-term sovereign credit ratings from B- to B. The rating agency forecasts GDP growth of 3% in 2017 and expects inflation to decline to 20% from 40% in 2016.

Improvements in these macroeconomic indicators will likely boost Argentina’s financial sector.

Leading Argentina-based banks have seen loan portfolio growth of above 20%, and higher financial activity in trading and asset management related activities. Argentina’s regulatory authority recently issued an operating license to Brazil’s BTG Pactual, the largest independent investment bank in Latin America (ILF) to enter Argentina’s banking sector. Creditcorp, LarrainVial and Goldman Sachs Asset Management are also queuing up for operating licenses in Argentina according to a report by the Financial Times. Furthermore, local retail banks are also raising equity to expand their operations. BBVA Frances (BFR) raised $400 million through an FPO (follow-on public offer) recently while Banco Macro (BMA) raised $666 million.

The Argentinean banking sector is primarily dominated by a handful of large national banks. The top three banks in the country held nearly 80% of total assets in 2016, making it highly concentrated. These banks also represent nearly 79% of the total loans.

Morgan Stanley (MS) sees significant opportunity in Argentina’s banking sector, as credit penetration remains considerably low in the country when compared to the region.

Currently, credit is merely 16% of Argentina’s GDP, compared to a historical average of 25% in the 1990’s and 35-40% for Latin American peers. However, Fernando Sedano of Morgan Stanley warns that inflation needs to decline for credit growth to take place. “Inflation is the key. Once it gets into single digits credit can increase at a much stronger pace,” he says, expecting that to happen by 2020.

Banking stocks to follow

Year to date, the MSCI Argentina Index has declined 5% while the MSCI Argentina Financials Index has surged nearly 50%. Comparatively, the Argentina benchmark MERVAL Index has rallied 49.5% in the year so far.

Banks like Grupo Financiero Galicia-B, Grupo Supervielle Sa Cl-B and Banco Macro Sa-B have returned between 70-80% over the year so far, and have outperformed broad market indices.

The largest Argentinean banks by assets are Grupo Financiero Galicia, Banco Santander Rio-B and Banco Macro. In 2016, these banks held assets worth $15.3 billion, $13.3 billion, and $9.7 billion respectively. Currently, shares of these banks have market caps of $5.8 billion, $4.2 billion and $6.7 billion on the Argentinean stock exchange.

Banco Galicia

Banco Galicia is one of the largest private sector banks in Argentina and the largest bank by assets. The bank offers a full range of financial products and services to nearly 8 million corporate and retail consumers. Banco Galicia has one of the largest distribution networks in Argentina, operating through 550 contact points and 200 services centers.

Banco Galicia’s margins have gained from consumption growth amongst the low and middle-income population in Argentina in the past decade. The bank is the largest issuer of consumer credit cards through its subsidiary Tarjetas Regionales. Banco Galicia is also the largest financier to Argentina’s agriculture sector with a market share of roughly 40%.

In June 2017, the bank reported assets of $14 billion (253 billion pesos), loans of $9.5 billion (159 billion pesos) and deposits of $9.3 billion (158 billion pesos).

In 2016, it generated revenues of $3.6 billion and net interest margins of 5.1%. Furthermore, Banco Galicia is also one of the most profitable Argentinean banks. In 2016, the bank reported return on assets of 2.9% and return on equity of 37.3%, highest among peers.

Grupo Galicia Class B (GGAL.BA) shares trade on the Córdoba Stock Exchange and have surged 82% in 2017 thus far. The bank’s ADRs trade on the NASDAQ with ticker GGAL. Grupo Galicia is a constituent of the Buenos Aires Stock Exchange’s benchmark MERVAL Index and also forms part of a number of ETFs investing in Argentinean equities (AGT).

Banco Santander Rio

Banco Santander Rio (BRIO.BA) is the second largest bank in Argentina in terms of assets. The bank held assets worth $13.3 billion in 2016 and has a market cap of $4.2 billion. Banco Santander is one of the largest banks in Argentina with nearly 2.5 million customers, 400 branches, and 7,800 employees.

In 2016, it generated revenues of $2.8 billion and net interest margins of 7.1%. The bank has a loan portfolio worth $7.4 billion and deposits worth $10.2 billion. In 2016, the bank reported return on assets of 2.9% and return on equity of 27.6%.

The company’s Class B shares are listed on the Buenos Aires Stock Exchange and have gained 18.9% in value in 2017 to date. Shares of the bank are also listed on the Madrid Stock Exchange with the ticker XBRSB.MC and on OTC Markets with the ticker BRPBF.

Banco Macro

Banco Macro (BMA.BA) is the third largest bank in terms of assets in Argentina and the largest by number of branches. The bank, established in 1976, serves 3.5 million customers through 445 branches and 1,415 ATMs across Argentina. The bank held assets worth $9.7 billion in 2016 and has a market cap of $6.7 billion, the highest among its peers.

Banco Macro is sixth-largest bank in Argentina by deposits and lending. In 2016, the bank reported assets of $9.7 billion, loans of $5.6 billion and deposits of $7 billion.

In 2016, Banco Macro generated revenues of $2.5 billion and net interest margins of 12.9%, highest among its peers. The bank reported return on assets of 5% and return on equity of 34.4%.

Macro’s large geographical reach is its biggest competitive advantage over its peers. The bank has a dominant market share in export-oriented sectors in Argentina which can generate high returns for the bank as Argentina’s export economy begins to recover.

The bank’s shares are listed on the Buenos Aires Stock exchange and have gained 71% in 2017 to date. Further, the shares are also listed on the Frankfurt, Stuttgart and Berlin Stock Exchanges with tickers B4W.F, B4W.SG and B4W.BE The company’s ADRs have been listed on the New York Stock Exchange since 2006 with the ticker BMA.

Valuations

Generally, banks are valued based on their price to book value multiples, but for Argentinean banks, this ratio may be a misleading indicator. Argentinean banks carry assets denominated in Argentinean pesos on their books that are valued on a historical basis. As such, analysts prefer to use the forward price to earnings ratios to value these banks.

Argentina’s banking sector currently trades at a steep discount to its Latin American peers. Morgan Stanley analysts base their optimism on Argentinean banks on attractive valuations and opportunities for consolidation. Argentina’s banks are currently trading at one-year forward price to earnings of 9-10x, compared to 10-12x for Brazil’s banks, 13-15x for Mexican banks and 16-17x for Chile’s banks according to Morgan Stanley.

However, Andrew Cummins of Explorador Capital Management, a Latin American investment firm believes that valuations of Argentina’s banks are stretched in the short term.

Argentinean banks are currently trading at an average one-year forward price to earnings ratio of 12x. In comparison, the MSCI Argentina Index trades at a forward PE of 16.3x while the MSCI Argentina Financials Index has a one-year forward PE of 13.4x.

Banco Macro SA, Bbva Banco Frances SA (FRAN.BA) And Grupo Supervielle SA (SUPV)(SUPV.BA) are the most attractively priced banking stocks based on their cheap valuations. These stocks have forward price to earnings ratios of 10.2x, 11.2x and 11.7x and are therefore trading at the steepest discount to their peers. Meanwhile, Banco Hipotecario SA (BHIP.BA) and Grupo Financiero Galicia are currently expensive with forward PEs of 14.9x and 12.2x respectively.

Analyst Outlook: The Four Largest Telecommunications Stocks in Latin America

Moody’s outlook for the Latin American telecom industry

Mexican and Brazilian players primarily dominate the telecommunications sector in Latin America. However, experts remain bullish on the sector throughout the continent as smaller countries in the region are relatively untapped and have significant room for growth in terms of mobile and Internet penetration. Moody’s has a stable outlook for the Latin American telecom sector in 2017 as the industry continues to struggle with sluggish growth and cuts in capital investments. Moody’s forecasts EBITDA margins for the industry to decline from 35.6% in 2015 to 33% in 2018.  Marcos Schmidt, Moody’s Vice President stated, “Larger companies such as America Movil  (A2 negative), Telefonica Brasil (Ba1 negative) and Oi (Caa1 negative) will all see EBITDA minus capital spending grow at rates below the sector average, amid difficult economic conditions in Brazil, Peru and Chile, plus stiffer competition in Mexico that will slow growth and shrink margins.”

Moody’s has a stable outlook for the Latin American telecom sector in 2017 despite the industry’s recent sluggish growth and cuts in capital investments. Moody’s forecasts EBITDA margins for the industry to decline from 35.6% in 2015 to 33% in 2018.  Marcos Schmidt, Moody’s Vice President stated, “Larger companies such as America Movil  (A2 negative), Telefonica Brasil (Ba1 negative) and Oi (Caa1 negative) will all see EBITDA minus capital spending grow at rates below the sector average, amid difficult economic conditions in Brazil, Peru and Chile, plus stiffer competition in Mexico that will slow growth and shrink margins.”

The agency also expects margins of telecom companies to decline due to cut-throat competition between operators. Mexico’s telecom space has become extremely competitive ever since new regulations were introduced in 2014. Dominant players in the country are compelled to cut prices, putting profit margins under pressure. Meanwhile, “In Brazil, companies such as Telefonica Brasil and Claro that focus on the postpaid market will be more resilient than Oi and TIM, which concentrate more on Brazil’s quickly shrinking prepaid market,” Schmidt says

The four largest telecom markets in Latin America are currently Brazil, Mexico, Argentina and Chile.

Brazil

Brazil is the largest telecom market in Latin America and the fifth largest globally. The telecommunications sector contributed nearly 4% to Brazil’s GDP last year while users of mobile services grew from 41 million last year to 80.6 million in August 2017. Currently, mobile internet in the form of 3G and 4G is accessible to 98.4% of the country’s population according to Telebrasil, Brazilian Telecommunications Association.

The Brazilian telecom market is primarily dominated by four large players – Spain’s Telefónica, Mexico’s América Móvil (AMX),  and Oi, controlled by Brazilian investors and Portugal and GVT.

In the last twelve months, the telecom market in Brazil has grown by 5.9% and is dominated by America Movil, Telefonica and Oi. The market leader America Movil added nearly 200,000 connections in the past one year, occupying 31% market share, while Telefonica and Oi command 27% and 23% of the market.

Spain’s Telefonica operates in Brazil as Telefónica Brasil and has branded its landline and mobile offering under Vivo. Mexico based América Móvil group operates as mobile operator Claro and cable TV services provider Net Servicos. Oi offers landline and mobile services under the Oi brand name. GVT is the country’s most successful alternative network provider, offering landline services only.

Mexico

Mexico is the second largest telecom market in Latin America with 89 million users, representing nearly 70% of the population. The telecom sector contributes nearly 3.5% to the country’s GDP.

The local market is owned by three major players. América Móvil’s Telcel has 67% of mobile connections, while Telefónica-owned Movistar has 24%, and AT&T, after acquiring Iusacell and Nextel in early 2015, occupies 9% of the market. Since 2010, mobile operator market shares have remained largely unchanged in the country.

Argentina

Argentina is of the most developed broadband markets in South America, second only to Chile. The telecom market in Argentina is primarily dominated by Telecom Argentina, Movistar, Claro, and Telecom Personal.  The local fixed-line industry is dominated Telecom Argentina (Telecom) and Telefonica de Argentina (TA) while the broadband market is occupied by Telefonica de Argentina, Telecom Argentina, and Grupo Clarin.

Chile

Chile’s broadband penetration is relatively high compared with other Latin American countries. In the past decade, Chile has benefited from solid GDP growth as larger Latin American economies have faltered. Currently, the country has one of the highest GDP per capita income, leading to high disposable income for telecom services.

Telefónica’s Movistar, Almendral’s Entel, and América Móvil’s Claro are the largest players in Chile, operating through Nextel Chile and VTR.

Telecom stocks to consider

Year to date, the MSCI World Telecom Index has surged 0.5%. Comparatively, the MSCI Brazil Telecom Index, MSCI Mexico Telecom Index, MSCI Argentina Telecom Index and the MSCI Emerging Markets Telecom Index have returned 23.5%, 48.2%,71% and 15.1% respectively.

Looking at ETFs, the iShares Latin America 40 ETF (ILF) invests 4.9% of its portfolio in Latin American telecom stocks while the iShares Global Telecom ETF (IXP) provides 2% exposure to Latin America telecom stocks. YTD, shares of these ETFs have returned 25.6% and 3.7% respectively.

The largest Latin American telecom stocks by market capitalization are America Movil, Telefonica Brasil, Tim Participacoes Sa, Telecom Argentina and Nortel Inversora.

Year to date, shares of these companies have returned 27.5%, 11.6%, 45.72%, 84.58% and 56.7% respectively.

The largest Latin American telecom providers by revenue are America Movil , Telefonica Brasil , Oi SA, Tim Participacoes SA, and Telecom Argentina S.A. In 2016, these companies generated revenues of $52.3 billion, $12.3 billion, $7.5 billion, $4.5 billion and $3.6 billion respectively.

America Movil

America Movil (MV9.F)(AMOV)(AMXL.MX) is the fourth largest mobile network provider in the world and a Forbes Global 2000 company. Controlled by Mexican billionaire Carlos Slim, it provides 363.5 million access lines, including 280.6 million mobile subscribers worldwide.

In Mexico, its subsidiary Telcel is the largest mobile operator commanding a market share in excess of 70%. The company operates in Jamaica, the Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, Peru, Argentina, Uruguay, Chile, Paraguay, Puerto Rico, Colombia and Ecuador through its Claro subsidiary while in Brazil it operates through Embratel and Claro. In the United States, it operates through its subsidiary TracFone. It is among the largest telecom providers in the United States. The company also own 30% of KPN, the Netherlands based telecom company and 60% of Telekom Austria Group. In 2007, America Movil acquired Jamaican telecom company Oceanic Digital. América Móvil acquired 100% of Jamaican mobile operator Oceanic Digital, under the brand name MiPhone in August 2007. On November 15, 2005, the company signed an international pact with Bridge Alliance to jointly deliver various international services.

America Movil is the largest Mexican company by revenues with annual sales of $52.3 billion in 2016. In 2016, the company owned assets of $73 billion, making it the largest company in Mexico by assets.

The company trades on the Mexican, New York and Frankfurt stock exchanges (MV9.F)(AMOV)(AMXL.MX). With a market value of over $63 billion, the company is currently the most valuable company in Mexico, more than the next three most valuable companies combined.

Telefonica Brasil

Telefonica Brasil (VIV)(VIVT3S.SA) is the Brazilian subsidiary of the Spanish telecom giant Telefónica. The company entered Brazil in 1998 while privatization of state owned Brazilian telecom company Telebras was taking place. Telefónica began their operations in Brazil under the brand Vivo in 2003 through a joint venture with Portugal Telecom. In 2015, Telefónica Brasil acquired GVT to become the largest telecom operator in Brazil.

As at June 2017, Telefonica served nearly 97.6 million customers in Brazil. The company generated revenues of $12.3 billion in 2016, pitting it against the largest global telecom players.

Oi SA

Oi (OIBR4.SA)(OIBR-C) is Brazil’s leading telecommunications service provider, and is one of the largest telecom companies in South America in terms of subscribers and revenues. The company operates through its subsidiaries Telemar and Brasil Telecom.

In June 2016, the company filed for a $19 billion bankruptcy protection, the largest so far in Brazil. The in-court reorganization has been slowed by ongoing disputes between creditors and shareholders.

In 2016, the company serviced 63.6 million customers and generated $1.1 billion in revenues. The company trades on the Brazilian and New York stock exchanges and has gained 59% in 2017 so far.

Tim Participacoes SA

Tim Brasil is the Brazilian arm of Italy based telecom provider Telecom Italia Mobile (TI). The company has nearly 61.3 million customers in Brazil and is the first mobile company to service all states in the country.

In the last twelve months, TIM was the fastest growing broadband operator in the country growing its subscriber base by 21% to 378,446. TIM is the fifth largest broadband player in Brazil with a market share of 1%. In 2016, Tim generated revenues of $8.8 billion, third highest among Latin American telecom companies.

Shares of the company are listed on BM&F Bovespa (TIMP3.SA) and NYSE exchanges (TSU) and have gained 46% in 2017 so far.

Analysts opinion

Analysts are wary of telecom companies in Latin America’s largest economies – Brazil and Mexico – as they struggle with political and economic uncertainty.

Recently, BTIG initiated coverage on Latin America’s largest telecom company America Movil with a neutral rating raising doubts in its ability to manage its shareholder’s returns along with its massive debt burden. However, the research house is bullish on Telefonica Brasil.

Analyst Walter Piecyk mentioned in a note to investors, “The bankruptcy filing of Oi closes another chapter in the development of the wireless market in Brazil and could mark a turning point for the industry. Investors have shown little interest in the Brazilian wireless industry in recent years given the economic and political turmoil combined with the inability of the wireless industry to consolidate … Telefonica Brasil, which uses the Vivo brand in Brasil, remains the safest way to play Brasil telecoms given its diversified business, synergy opportunity and strong management team. Its stock has materially outperformed TIM Brasil, resulting in what now might be an unwarranted valuation premium …

America Movil’s total enterprise Value is slightly over 5x our 2017 EBITDA estimate in a year that we expect no growth. The stock price also implies a free cash flow yield of 7%, but primarily because of the more than 20% cut in capital investment expected this year, which we believe could have longer term negative implications for revenue growth potential. America Movil sometimes issues special dividends, but given the lack of free cash flow growth at the company and share repurchase we estimate a dividend yield of less than 3%this year and next,” the note continued.

Shares of America Movil have received 4 buy ratings, 2 sell ratings and 11 hold ratings. In comparison, Telefonica Brasil has received 13 buy ratings and merely 4 hold ratings. Telefonica Brasil has received no sell ratings. TIM has received 4 buy ratings, 2 sell ratings and 11 hold ratings. Analysts are most bearish on shares of Oi after the company filed for bankruptcy protection last year. The company has received 2 hold ratings and 3 sell ratings.

Valuations within the Latam telecom sector are stretched with average one-year forward PE ratio of 23x.

Nortel Inversora (NTL)(NORT6.BA), Cnt Telefonica Del Sur (TELSUR.CI) and Telecom Argentina (TEO) are the most attractively priced telecom stocks based on their cheap valuations. These stocks have one year forward PEs of 3.4x, 7.4x and 17x, and are trading at the steepest discount to their peers. Meanwhile Almendral Sa, Empresa Nacional De Telecom (ICA) and Atom Participacoes (ATOM3.SA) are expensive stocks.

5 Mexican ADRs With Attractive Valuations Since Trump Entered The White House

Mexican ADRs are commanding increased investor interest

Mexico’s stock market has been commanding increased investor interest ever since President Donald Trump set foot in the White House. His protectionist pledges against Mexico have weighed down the Mexican peso sharply against the US dollar (UUP). Mexican equities on the local stock exchange, as well as listed ADRs trading on the US stock market (SPY) (IWM), had taken a hit. The Mexican equity-tracking iShares MSCI Mexico Capped ETF (EWW) touched its 5-year low ($42.64 a share) on January 16 this year. The Mexico Fund, Inc. (MXF) and the Mexico Equity & Income Fund Inc. (MXE) are other US-listed funds providing exposure to Mexican equity.

Top 5 Mexican ADRs

ADR Ticker Name Sector – Industry P/E P/B YTD Return%
BSMX Grupo Financiero Santander Mexico SAB de Financials- Bank 13.81 2.21 47.25
CX Cemex SAB de CV Materials- Construction 13.83 1.48 20.79
MXCHF/

MXCHY

Mexichem SAB de CV Materials- Chemical 14.69 2.01 20.25
BRGGF Banregio Grupo Financiero SAB de CV Financials- Bank 14.53 2.74 16.32
GBOOF/

GBOOY

Grupo Financiero Banorte SAB de CV Financials- Bank 17.18 2.54 45.87
Note: Returns and ratios relate to data as of August 10, 2017

 

Stock market recovering, economic indicators favorable

However, the markets appear to have recovered from their January abyss now; the EWW is up 30% since January 16 (as of August 10). Moreover, economic indicators seem to be putting Mexico in a favorable light; GDP growth gradually gaining, unemployment is low , inflation has been rising fuelled by consumer spending, and the country’s balance of trade position is substantially better now.

However, Mexican equity still has a long way to go before it sees its market recovering to levels seen before the oil price plunge in mid-2014. The price of oil matters to Mexico as oil revenues make up close to 10% of the Latin American (ILF) economy’s export earnings. The EWW had seen trading in $65-$70/share range until the third quarter of 2014.

US investors seeking bargain opportunities

Now, while Mexican equities take their time to gain pace as they tread northward, long-term investors are seeking out bargain opportunities. For US investors, there are a lot of Mexican companies which have their ADRs trading on the US exchanges. We filtered the list for you, to arrive at the top 5 Mexican ADRs currently trading at the most attractive valuations on the US exchanges. These include 2 companies from the materials sector and 3 from the financial sector (see table above).

Ecuador’s Anti-OPEC Decision Raises Fear of Contagion Amongst Other Members Countries

Ecuador straining relations with the OPEC

Ecuador has publicly stated that it will not adhere to OPEC’s (Organization of the Petroleum Exporting Countries) production curbs. The steep slide in oil (OIL) (USO) prices since mid-2014 led OPEC members, in November 2016, to sign a pact to curb oil production by 1.2 million barrels a day starting January 1, 2017. In December, non-OPEC members such as Saudi Arabia (KSA) and Russia (RSX) had also agreed to reduce output by 558,000 barrels a day to help address price slide triggered by the supply glut. Accordingly, OPEC oil production had dropped by 32.5 million barrels a day from January 1st, lending some respite to the steep fall in oil prices since mid-2014.

The price of crude oil has now recovered nearly 50% since its lowest point seen in January 2016.

Need to plug the economy’s fiscal deficit

Ecuador’s decision is backed by the country’s need to plug its fiscal deficit. According to Ecuador’s oil minister, Carlos Perez, “we are not meeting the quota imposed on us because of the obvious needs the country has……… there’s a need for funds for the fiscal treasury, hence we’ve taken the decision to gradually increase output.” The Latin American (ILF) (GML) economy’s compliance on its agreed quota of 26,000 barrels a day cut in oil production was seen falling to 69% in June. Accordingly, the country has been falling short by about 10,000 barrels a day.

According to Perez, Ecuador remains committed to the pact and its support towards the Organization. However, as per a non-written agreement with OPEC on flexibility in terms of production needs, the economy could now be curbing production by approximately 16,000 barrels of oil per day.

June 2017 has already seen OPEC production up by 1.2% vis-à-vis May. Output for OPEC averaged 32.61 million barrels a day last month, with Ecuador contributing 1.75% of it. Besides, countries such as Libya and Nigeria, which are exempted from the output-cut agreement on account of social instability, have been pumping in more oil.

Ecuador’s decision raises the fear of a contagion

Markets fear the risk of a contagion to other OPEC economies. Ecuador’s move could encourage other OPEC nations such as Algeria, Angola, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Qatar (QAT), UAE (UAE), and Venezuela to rethink their commitment to the production curb. Other OPEC members following suit could impact the recovery in oil prices achieved since last year. Kazakhstan’s intended ‘soft exit’ from the deal be taken as a hint.

No More Border Wall: Ecuador to Mend Relations With Peru

Suspension of the Ecuador-Peru border wall

On July 14th, Ecuador’s Foreign Minister Maria Fernanda Espinosa announced that the country had decided to halt the construction of the border wall with Peru (EPU). The wall was built as a flood precaution by Ecuador. It has been the center of controversy for some time now, straining diplomatic relations between the two countries. The issue had gained prominence following US President Donald Trump’s pledge to build a wall between the US (SPY) (IWM) and Mexico (EEW).

Peru, which believes that the wall infringed on a 1998 deal which prohibits construction within 10 meters of the border, recently recalled its ambassador from the country to express its rage over the decision. Subsequently, the foreign ministry of Ecuador announced the suspension of the construction of the mile-long, 13-foot high wall between the two Latin American (ILF) (GML) countries.

Ecuador mending relations with Peru

The suspension should bode well for Andean (AND) countries. The wall would have led to about 5,000 job losses on each side of the wall, primarily in the local fish trade. Currently, fishermen cart their fresh catches over the canal which outlines the border across bamboo footbridges. With the wall in place, workers would have had to take a lengthy detour to unload their catches in Peru probably putting an end to the trade.

Moreover, Peru counts among the top 3 export destinations of Ecuador. Close to $1 billion worth of goods are exported from Ecuador to Peru, accounting for 5.1% of its exports (see chart above). The wall would have certainly impacted cross-border trade volumes.

Now, while on one hand, Ecuador has taken a step to mend its diplomatic relations with Peru, on the other hand, it stands a chance to strain its relations with the OPEC (Organization of the Petroleum Exporting Countries). The next part of this explains how.

Political Turbulence Notwithstanding, Temer’s Reforms Have Helped Brazil Emerge Out of Recession

Brazil emerged out of recession after 8 consecutive quarters

Since President Michel Temer took office in August 2016, Brazil’s economy has recorded some positive economic indicator readings, despite the current political turbulence. Inflation is falling and the economy finally emerged out of recession in 1Q17 after 8 consecutive quarters of declining growth.

Temer’s pro-market economic reforms, along with the rebound in commodity prices, seem to be paying off for Brazil. According to a recent report by the IBGE, Brazil’s Statistics Bureau, the economy registered growth of 1% in the first quarter of 2017. The economy of Brazil continues to show signs of recovery. The government expects the economy to grow at 0.5% for 2017.

Inflation has cooled significantly, from over 8% up to September 2016, to 3.6% as of May 2017. The jobless rate in Brazil also edged down to 13.6% in the quarter ended April 2017.

The Latin American (ILF) economy is also focused in its resolve to enter the OECD (Organization for Economic Co-operation and Development), which is part of its reform agenda according to Finance Minister, Henrique Meirelles.

Economic tailwinds boost equity prices in Brazil

Meirelles sees the markets as “relatively stable.” US-listed stocks of companies such as Ambev S.A. (ABEV), Itaú Unibanco Holding S.A. (ITUB), and Vale S.A. (VALE), have returned 11.02%, 6.8%, and 10.3%, respectively YTD (as of June 12). Petróleo Brasileiro S.A. – Petrobras (PBR), down 17.3% YTD, was weighed down by the political headwinds surrounding the company’s executives.

Overall, economic tailwinds, continue to boost equity prices in Brazil as reflected in the surge of the Brazilian-equity tracking iShares MSCI Brazil Capped ETF (EWZ) which has returned 30.7% to investors over the past year (as of June 12).

Have Political Headwinds Changed Course For Brazil After President Temer’s Acquittal?

Michel Temer acquitted by the Brazilian court

Brazil’s President, Michel Temer, was freed of charges of soliciting illegal campaign donations by the Brazilian court on Friday, June 9th. “You don’t remove a president whenever you please,” marked Gilmar Mendes, the court’s top judge, citing that the evidence presented was not enough to prove that the illegal money that went to the political parties was used in the campaign.

Have political headwinds changed course in Brazil?

Political corruption isn’t new to Brazil (EWZ) (BRF) (BRZU). Temer himself is a survivor of several other scandals and charges in the past. The Mensalão scandal, Operation Car Wash, and the Petrobras scandal serve as important examples of the close links between Brazilian politics and political corruption in Brazil.

The Mensalão scandal: a vote-buying case of corruption that threatened to bring down the government of Lula da Silva in 2005.

Operation Car Wash: investigation being carried out by the Federal Police of Brazil, Curitiba Branch under Judge Sérgio Moro since March 17, 2014. Initially a money laundering investigation, it has expanded to cover allegations of corruption at the state-controlled oil company Petrobras (PBR) (PBR-A) (PBRA).

The Petrobras scandal: uncovered in 2014, it remains the largest corruption scandal in the history of Brazil. According to the investigation, top Petrobras executives colluded with an organized cartel of 16 companies to allegedly accept bribes in return for awarding contracts to construction firms at inflated prices. Petrobras officials estimate the bribe amounts to a total of nearly $3 billion.

Taking a Look Further Back

In August 2016, Brazil’s first female president, Dilma Rousseff, was removed from office while serving her second four-year term. Rousseff was charged with criminal administrative misconduct and disregard for the federal budget. Rousseff was also accused of failing to act on the Petrobras scandal or on the allegations uncovered by the Operation Car Wash investigation. She was replaced by Vice-president Michel Temer who is currently the 37th President of Brazil.

One of the largest incidents of political corruption of this generation in this Latin American (ILF) economy actually dates back to 1992 when Fernando Collor de Mello, the country’s first democratically elected president, was impeached on corruption charges.

A Contrarian View on NAFTA Renegotiation and Its Impact on Mexico

Renegotiation of the NAFTA not likely to affect Mexico

Amundi Asset Management currently sees significant value in Mexico (EWW). The $1.4 trillion fund house has been invested in Mexico since February this year. In early May, Abbas Ameli-Renani, global emerging markets strategist at Amundi confirmed his firm’s belief that any renegotiation of NAFTA (North American Free Trade Agreement) is not likely to affect Mexico significantly.

Mexico: the near darling from Latin America

Within Latin America (ILF), Brazil (EWZ) and Argentina (ARGT) have been the crown jewels since 2016. “The near darling from Latin America for this year is going to be Mexico,” said Renani in a Bloomberg interview in late April. Renani pointed to Mexico’s improving trade balance position to cushion his stance (chart above).

Following a steep decline in the Mexican peso through 2016, the Latin American (ILF) economy and its currency have shown significant improvement since the beginning of 2017. The iShares MSCI Mexico Capped ETF (EWW) was up 19.2% YTD as of May 16, with the real estate and telecommunication services sectors both returning over 24% YTD. Top gainers within the EWW include Grupo Famsa SAB – A (61.85% YTD) (GUFAF), Grupo Gicsa SA De CV (46.8% YTD), PLA Administradora Industria (44.9% YTD), and Bolsa Mexicana De Valores SA (40.98% YTD) (BOMXF).

[stockdio-historical-chart stockExchange=”NYSENasdaq” width=”100%” symbol=”EWW” displayPrices=”Lines” performance=”false” from=”2017-01-01″ to=”2017-05-16″ allowPeriodChange=”true” height=”350px” culture=”English-US”]

US growth to benefit Mexico

While Mexican assets have already shown improvement since the beginning of the year, Renani believes that there’s more scope for that performance to continue.

Moreover, “if US (SPY) (IWM) (QQQ) growth picks up, no country benefits more than Mexico,” said Renani during the Bloomberg interview. “We are less worried about the protectionist rhetoric of Donald Trump, and Mexico specifically. In fact, we think that Mexico is going to benefit from the acceleration of growth in the Unites States.”