May 23, 2013
LatAm slowdown a red flag for Iberian firms
A slowdown in Latin America’s once booming economies could take a heavy toll on profits for Spanish and Portuguese companies whose two-decade investment spree abroad has provided a lifeline during a deepening crisis at home.
The region accounts for almost 15 percent of Portuguese companies’ revenues, and the equivalent figure for Spain is 33 percent, the highest in Europe, according to Morgan Stanley.
For the likes of utility EDP or oil explorer GALP of Portugal, and Telefonica and lender BBVA in Spain, Latin America generates over half of group sales.
But life could be about to get tougher.
“Maybe Latin America is no longer as attractive as it used to be. If... Spain and Portugal were stable, things would be ok, But that’s not the case,” says Jaime Ramos Martin, a fund manager at Standard Life Investments.
Iberian companies began their love affair with Latin America in the early 1990s, embarking on an acquisition binge that, according to Thomson Reuters data, saw over 130 billion euros flow across the Atlantic.
Dubbed the Reconquista in a nod to Spain’s 16th colonizations, the investments have yielded rich returns, providing companies with a slice of the fast growth and surging consumer demand in powerhouses such as Brazil and Mexico.
Those profits have offset shrinking revenues at home.
But Latin American economies are now slowing too, hit by China’s waning appetite for commodities, the stop-start US recovery and, ironically, the crisis rippling out of Europe.
Dominant Brazil may expand less than 2 percent this year, say economists polled by Reuters, from a recent five percent average. Peru and Chile, once growing at China-like rates of between seven and nine percent, are likely to chug along at around four percent.
That is very bad news at a time when Spain and Portugal are mired in recession, with record unemployment, collapsing housing markets and falling consumer spending. Portugal is already on life support via a bailout, while Spain may soon need a full rescue too to go with an existing aid package for its banks.
“I don’t think Latin America can save Spain and Portugal,” said Diego Iscaro, economist at IHS Global Insight.
Exposure to these emerging economies might help, but “that is assuming that activity in Latin American countries remains strong, which is still far from clear given the deceleration already evident in... Argentina and Brazil.”
As in the 16th century, the path to Latin American riches has been littered with pitfalls.
Iberian investors have endured currency collapses, recessions and asset expropriations, most recently for Spain the grab of oil firm Repsol’s subsidiary YPF in Argentina and similar moves in Bolivia against power company Red Eléctrica.
Yet the real danger is not outright expropriation but a growth and consumption drop that will erode sales and earnings.
Telefónica is a good example.
Desperate to pare its 57-billion euro debt mountain, the telecoms operator cut dividends for the first time since the Spanish Civil War. Its net profits, meanwhile, fell by a third.
Latin America provides half of Telefónica’s revenues, led by Brazil. The mobile phone market there has more than doubled in the past five years but is now losing steam.
In the latest quarter, Telefónica Brasil added new subscribers at half the rate of last year. Its profits fell as the struggling economy generated a surge in non-payments.
For Spain’s top lender Banco Santander, Brazil provides a quarter of group profits, but earnings there sank 17 percent in the first half due to a spike in bad loans.
NOT ALL BAD
Some investors who for years have favoured shares in companies with emerging markets exposure are now bracing for the pinch as growth in the developing world slows.
But others see opportunities in a wary market that has, for instance, driven Telefónica’s stock down 32 percent this year.
“Companies like Portugal Telecom, Galp and Banco Santander all have over half of their assets... in Latin America. We believe the current share prices give too little credit for the earnings prospects in their overseas operations,”
said Rob Radelaar, senior portfolio manager at ING Investment
For Standard Life’s Ramos Martín, shares such as Telefónica, where slowing Latin revenues are compounding the collapse in local business, are no longer a good buy. But he still holds many Iberian stocks including Portuguese oil exploration firm GALP which has huge concessions in Brazil.
For others like Spanish media firm Prisa, Latin America is also still rewarding.
Chief executive Fernando Abril Martorell says the region contributes 27 percent to company revenues, up from 23 percent in early 2011.
“Diversification is really compensating for the weak environment domestically,” he told an analyst conference call.
And assets acquired over the years are proving a useful source of cash. Santander’s sale of its Colombian operations for US$1.225 billion will net it an estimated capital gain of 615 million euros.
Ricardo Martínez, president of the Equipo Económico investment consultancy in Madrid, said companies can also raise funds on Latin American markets.
Santander did that in Brazil via an US$8 billion IPO in 2009 and is now considering floating its Mexican business.
“Mexico or Brazil are markets where they can find the liquidity they need for investment,” Martínez said.