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    Latin America Equity Research Overview July 2012

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    Latin America overview

  • Latin Am

    erica Equity Research

    Overview

    July 2012

    2

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    c Latin America sector by sector Sector

    Energy Materials Industrials

    Consumer Discretionary

    Consumer Staples Health Care Financials

    Information Technology

    Telecommunication Services

    Utilities

    Weight in MSCI Latam 13% 20% 5% 4% 16% 1% 21% 2% 9% 8% Key sub-sectors Integrated Oil & Gas

    (87%) Steel (57%) Industrial Congloms

    (33%)Broadcasting (33%) Brewers (30%) Managed Heatlh

    Care (63%)Diversified Banks

    (81%)Data Processing &

    Outsourced Services (87%)

    Wireless Telecommunication

    Services (82%)

    Electric Utilities (57%)

    Oil & Gas Storage & Transportation (8%)

    Diversified Metals & Mining (14%)

    Highways & Railtracks (25%)

    Department Stores (29%)

    Hypermarkets & Supercenters (22%)

    Health Care Services (37%)

    Specialized Finance (6%)

    Systems Software (13%)

    Integrated TelecomsServices (18%)

    IPP & Energy (31%)

    Oil & Gas E&P (5%)

    Construction Materials (8%)

    Airlines (17%) Home Building (17%)

    Soft Drinks (21%) n/a Real Estate Oper Companies (4%)

    n/a n/a Water Utilities (12%)

    Three largest stocks Petrobras (9.41%) Vale (8.69%) Lan (0.99%) Televisa (1.43%) Ambev (3.87%) DASA (0.22%) ItauUnibanco

    (4.41%)Cielo (1.12%) AMX (6.84%) Cemig (1.16%)

    Ecopetrol (1.98%) GMexico (1.45%) CCR Rodovias(0.94%)

    Falabella (0.61%) Femsa (2.23%) Odontoprev (0.18%) Bradesco (3.88%) Redecard On (0.75%)

    Telef Brasil (0.97%) Endesa (0.74%)

    Ultrapar Partp (0.96%)

    Cia. Minas Buenaventura ADR

    (0.99%)

    Copec (0.91%) Lojas Renner(0.48%)

    Walmex (1.83%) Amil (0.17%) Itausa (1.48%) Totvs (0.28%) Tim Part (0.61%) Enersis (0.64%)

    Trading data Free float mkt cap (USDbn) 95 158 40 34 123 4 170 16 71 57 ADTV (5 year) (USDm) 566 796 129 242 219 17 687 5 221 194 Perf in last 10 years * Absolute 710% 738% 343% 216% 638% 158% 878% -78% 481% 711% Relative to MSCI Latam 16% 20% -36% -55% 6% -63% 40% -97% -17% 16% Correlations of sector MSCI index returns (5 year) with

    MSCI Latam 0.90 0.94 0.88 0.88 0.91 0.22 0.93 0.41 0.92 0.80 Nominal GDP (Latam area) 0.81 0.89 0.86 0.87 0.88 0.11 0.93 0.26 0.86 0.82 US ISM 0.31 0.50 0.47 0.41 0.39 -0.10 0.33 0.21 0.30 0.24 Key sector stats 12m forward sales growth 8% 6% 10% 11% 12% 12% 20% 12% 8% 2% 12m forward EPS growth 10% -1% 21% 16% 12% 23% 11% 7% 16% 10% Long-term avg 12m fwd PE 7.7 8.7 13.8 15.1 16.0 25.3 10.3 14.5 11.8 14.9 12-month forward PE 8.2 8.3 17.7 13.4 21.1 19.6 9.8 15.7 11.6 11.5 Long-term average PB 1.9 1.8 1.8 2.8 2.6 3.9 2.0 10.0 2.5 0.8 Current PB 1.1 1.5 2.7 2.4 3.6 2.9 1.7 16.3 2.5 1.3 Long-term average ROE (%) 22% 19% 11% 15% 13% 8% 19% 142% 19% 7% Current ROE 10% 15% 8% 17% 13% 9% 15% 84% 17% 10% *Including dividends. Priced as at 30 June 2012 Source: HSBC, Thomson Reuters Datastream, MSCI, I/B/E/S

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    Latin America Equity Research Overview July 2012

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    Introduction Latin America experienced significant economic growth in the last decade, an improvement from the 1980s, the so-called lost decade, characterized by defaults, currency crises, high inflation, and the economic stagnation that ensued. Transitions from authoritarian political regimes to democracies took place in many countries, but it was not until the implementation of structural reforms, including privatizations, trade liberalization and the adoption of transparent and stable economic policy regimes in the 1990s, that the region subsequently achieved above-average growth.

    Asset prices soared to reflect this growth, as can be seen in chart 1, which shows the MSCI Latin America index jumping tenfold from 2002 until the 2008 crisis. Even when the regions financial market volatility resurfaced during the 2008 crisis, and equities fell back c60%, strong economic foundations and strong policy responses allowed for a relatively quick recovery from the lows. Market structure Latin Americas largest companies are shown in table 2. The consumer staples (AmBev, FEMSA and Walmart de Mexico) and financials (Ita Unibanco, Itasa and Bradesco) sectors each contribute three companies. The energy sector (Petrobras and Ecopetrol) is represented by two companies. A telecom (America Movil) and a materials company (Vale do Rio Doce) complete the list. Combined, these 10 stocks accounted for 44.6% of the total market capitalization as of June 2012.

    Latin America overview

    Alexandre Gartner* Equity Strategist HSBC Bank Brasil SA + 55 11 3371 8181 alexandre.gartner@hsbc.com.br

    Francisco Machado,* CFA Equity Strategist HSBC Bank Brasil SA + 55 11 3371 8191 francisco.v.machado@hsbc.combr

    Andre Loes Chief Economist HSBC Bank Brasil SA + 55 11 3371 8184 andre.a.loes@hsbc.com.br *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations

    1. MSCI Latam price index (USD)* 2. Largest stocks in MSCI Latam

    -

    2,000

    4,000

    6,000

    8,000

    10,000

    02 03 04 05 06 07 08 09 10 11 12

    Stock rank Stock name Index weight

    PETROBRAS 9.4% VALE 8.7% AMX 'L' 6.8% ITAUUNIBANCO PN 4.4% BRADESCO PN 3.9% Top 5 33.2% AMBEV PN 3.9% FEMSA 'UBD' 2.2% ECOPETROL 2.0% WALMEX 'V' 1.8% ITAUSA PN 1.5% Top 10 44.6% Source: HSBC, Thomson Reuters Datastream, MSCI

    * Index with gross dividends reinvested in local currency Source: HSBC, Thomson Reuters Datastream

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    Latin America Equity Research Overview July 2012

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    The largest sector in Latin America is financials, with a 21% weight in the index, as of June 2012. The commodities group is also well represented and combined materials (20%) and energy (13%) account for 33% of MSCI Latam. Consumer staples (16%) and telecommunications (9%) follow behind.

    The most important market by far is Brazil, with a 60% weighting in June 2012, followed by Mexico with 22%. The other three countries rank as follows: Chile (9%), Colombia (6%) and Peru (3%).

    All markets are highly concentrated, led by Peru where only four stocks make up for the whole index. In Colombia, the top five stocks represent 70% of the country index, followed by Mexico (64%), Chile (44%) and Brazil (38%) (table 3).

    Overall liquidity in Latin American stock markets is very low outside Brazil and Mexico. Peru is the most illiquid market, with only USD14m daily average turnover for the last five years, followed by Chile with USD149m and Colombia with USD154m. Brazil ranks as the most liquid with USD2.5bn daily average volume in the last five years, followed by Mexico with USD432m.

    Higher liquidity, deeper markets and more investor participation has translated into higher market volatility for Brazil. Indeed, in volatile market conditions, Brazil is used also to hedge exposure to the region as a whole, on both the long and short side. The country index ranks first in annualized volatility in both a five- and 10-year window (table 4). Next in line are Peru, the most concentrated market with only four stocks components, followed by Colombia and Mexico. Chile is the least volatile market in both time frames, benefiting from c25% weighting of the more stable utilities sector.

    The volatility of earnings is not necessarily correlated to market volatility in Latin America. Earnings in Brazil have been the most stable in the region over the last ten years, despite having the highest equity market volatility. Chile ranks second in terms of low earnings volatility in-line with its less volatile market, followed by Mexico. Colombia and Peru have the most volatile earnings profiles as they are more concentrated in fewer company results.

    Correlations Latin American markets in general have a high correlation to the region index led by Brazil with an almost one-to-one relationship.

    The Mexican index is the most correlated to US economic conditions, as measured by the ISM index, which makes sense as both countries share borders and have a high interconnectedness. Next are Brazil and Colombia with 77% and 73% respective correlations in the last five years. All countries indexes but

    3. MSCI Latam: Country weights of top five stocks, June 2012 4. MSCI Latam: Earnings and index volatility

    Top 5

    Peru 100% Colombia 70% Mexico 64% Chile 44% Brazil 38% Source: HSBC, Thomson Reuters Datastream

    __Trailing earnings vol _ _ Market volatility* __ 5 years 10 years 5 years 10 years

    Brazil 16% 15% 45% 39% Chile 13% 25% 27% 24% Colombia 30% 53% 33% 33% Mexico 18% 23% 35% 28% Peru 49% 79% 41% 33% Latam 14% 19% 39% 32% Source: HSBC, Thomson Reuters Datastream. Note: *calculated as the annualised standard deviation of monthly changes for USD MSCI country indexes (ex-dividends)

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    Latin America Equity Research Overview July 2012

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    Peru are well correlated to each country economic conditions, as measured by GDP.

    Global growth is also important, as measured by the correlation of stock market performance to country exports. Chile, Mexico and Peru are very open economies with a high percentage of imports and exports to GDP and therefore a high correlation between exports and stock market performance was to be expected. Colombia and Brazil, on the other hand, are considered more closed economies and therefore the impacts of trade flows on growth are lower.

    The key takeaway is that among Latin American countries, Chile, Mexico and Peru are sensitive to global economic growth conditions, with Mexico particularly s