Outlook for CEEMA equities appears challenging
Citi analysts continue to expect slower growth in 2012 with relatively contained inflation. This will provide scope for lower interest rates in some countries, with a series of 0.5% rate cuts expected to bring rates down to 9.5% in Brazil. For Mexico, recent inflation data reinforce the view for stable rates this year. The electoral scene remains uncertain in Venezuela, while Argentina's government has further strengthened exchange rate controls.
CEEMEA1 remains at the centre of risks associated with general risk aversion among investors as well as the specific risk of European bank deleveraging. Large external financing requirements in Turkey and Poland could also continue to underpin the region's vulnerability.
CEEMEA currencies, particularly Israeli Shekel (ILS) and South African Rand (ZAR) are expected to come under the most pressure near term, but then broadly recover 6-12 months out. Latam currencies are expected to remain relatively supported though the Chilean Peso (CLP) is the notable exception.
While earnings downgrades are expected in Latam, Citi analysts do not anticipate an earnings recession and believe the region is poised for gains this year. Furthermore, it trades at 1.7x P/B, attractive compared to an historical average of 2.1x P/B and the same level as in late 2008 to early 2009. Citi's preferred markets are Brazil, Chile and Peru.
Despite attractive valuations, the outlook for CEEMEA equities looks challenging due to the region's greater proximity to Europe. Under such conditions, Citi analysts prefer stocks with pricing power, sustainably high margins, low leverage and dividends. Citi's favoured market is South Africa, where earnings growth is expected to be relatively high, and where historically earnings have been less volatile.
1. CEEMEA is the collective term for Central and Eastern Europe, Middle East and Africa.