2017 was a much better year than 2016 both in absolute and relative terms
Almost 80% of our covered stocks showed positive returns in 2017, but only39% managed to outperform their respective MSCI country index (versus 59%and 28%, respectively, 2016). As we noted throughout the year, there wasa wide divergence between discretionary retailers and staples stocks: 2017was an exceptional year for Brazilian discretionary retailers, which (with theexception of Lojas Americanas) posted very high positive returns in USD termsand outperformed the Brazil MSCI Index by at least 50% driven by an incipienteconomic recovery, a sharp drop in inflation, monetary easing and a fallingunemployment rate. In addition, several blue-chip staples stocks also performedwell (albeit to a lesser extent). On the other hand, most Brazilian meat producers/packers had another bad year, mired by ongoing government investigations,high leverage and management turnover. But the biggest negative surprise wasLiverpool, which bore the brunt of investors' fears (exaggerated, in our view)regarding Amazon's expansion into Latin America.
Updating annual total return analysis
In this issue, we update our long-term total return analysis (last published inthe January 2017 issue) for the stocks in our coverage universe, to reflect 2017results. While last year was not a good year in terms of index outperformance,our analysis continues to underscore the long-term attractiveness of the LatamConsumer sector (as most of the stocks with 10-year records have outperformed).
2018 could be volatile (MX/BR elections), so we remain generally defensive
With GDP growth expected to pick up in all major Latam markets, 2018 shouldbe a generally positive year for consumer stocks. We expect discretionary retailstocks (the stars of 2017) to decelerate, giving the stage to food retailers (our Buyratednames in this space are CBD, FEMSA, Exito and Carrefour Brasil). There isone exception: we believe that Liverpool, the one stock in the discretionary spacethat fell in 2017, will stage a comeback (as should Kimberly-Clark de Mexico,another strong-MXN play). Among Food and Beverage companies we continueto prefer Chile-based Andina (undervalued with significant Brazil exposure) andConcha y Toro (on cost reduction program and potential strong harvest), MexicobasedGruma and Grupo Bimbo (both beneficiaries of US tax reform, and oversoldin our view) and Brazil-based Minerva (on favorable cattle cycle and synergiesfrom the Southern Cone acquisition in 2017).
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