Forbes Articles

International Investing
Date: 11.11.2002

Troubles in Latin America, says investment banker Violy McCausland, make this exactly the time to invest there.

Beset by banking crises, lawlessness and left-wing politicians, Latin America today isn't exactly El Dorado, the lost City of Gold that so fascinated the explorer Coronado. But to Violy McCausland, now is exactly the time to buy Latin American stocks. She sees bargains scattered like gold nuggets throughout this rough terrain.

Going against the conventional comes easily to McCausland, president of New York investment banking firm Violy, Byorum & Partners. She brashly derides her former employers at J.P. Morgan, where she headed Latin American mergers and acquisitions, as "Communists" for their deadening conformity. She is unapologetic about her exit from that firm: She left in 1993 after privately borrowing money from a Morgan client, a conflict of interest. (She says the firm, put off by her maverick style, wanted her out anyway. From 1987 to 1993 her group drove $300 million in fees.)

McCausland, 48, Colombian-born and partial to brilliantly colored caftans, has a good track record in figuring out how to score in Latin investing. Since forming the firm in 1996 with Citicorp veteran Stormy Byorum, her shop has advised on deals totaling $13 billion, netting $200 million in fees. One early coup: persuading the Cisneros family of Venezuela to shift its soft-drink bottling affiliation from PepsiCo to Coca-Cola.

"The conventional view is Latin America is in crisis, so there is no opportunity," she says, sitting at her desk and backed by a Dr. Seuss mural. She sees an abundance of opportunity there. While financial giants like Morgan and Goldman Sachs are in retreat in Latin America, Violy, Byorum built offices in Brazil and Mexico just last year.

McCausland isn't a stock picker, but her perch as an investment banker in the region provides keen insight into promising, undervalued companies that should rebound in better economic times (see table).

Latin Rhythm
McCausland likes the good, cheap stocks that abound in the region.

And are they ever cheap. Almost without exception, the companies trade at far lower multiples than their U.S. counterparts--and below the S&P 500's earnings multiple of 28. McCausland likes Peruvian cementmaker Cementos Lima, trading at a tiny trailing price/earnings ratio of 1.4; LaFarge North America, the Herndon, Va.-based cement company, trades at 8 times earnings.

She also likes Mexico's Coca-Cola Femsa, which has widened its profit margins and has a mere 13 P/E. Atlanta-based Coca-Cola Enterprises, the world's largest Coke bottler, has a 30 P/E.

Even in war-torn Colombia, she argues, certain regions and industries are booming. Almacenes Exito, the Wal-Mart of Colombia, is expanding into Venezuela. Colombia's Bavaria, a beer company, is moving into Panama and Peru. Nacional de Chocolates, the confectionery company, will be selling its sweets in Central America. All have strong brands. Colombia itself is a good place to invest, she says, despite its enormous murder and kidnapping problems. Her rationale: "There are parts of the Bronx you wouldn't go to and people still do business in New York."

Note how almost all the stocks in the table are off their 52-week highs. A couple can be purchased as American Depositary Receipts--Coca-Cola Femsa and Mexican cementmaker Cemex. The rest can be bought through a stockbroker, who can buy on foreign exchanges.

Buying these issues is a contrarian play. Despite the cheap prices, merger-minded multinationals are avoiding the region, says Brian O'Neill, chairman of J.P. Morgan Chase's Latin American investment banking unit. The same goes for buyers of individual Latin securities: Outside investment volumes in Latin America reached $1.5 billion per day in 1997, but have since slowed to a $300-million-per-day trickle.

The only Latin American country McCausland is wary of is Argentina, now suffering from a crippled banking system. That tax-laden, bureaucracy-heavy country is in the fourth year of a painful recession made worse by a freeze on withdrawals from savings accounts. This has driven out foreign bankers and squelched the business and consumer lending that the once well-functioning economy needs. "Argentina had everything, but the people were arrogant," she says of the nation's leaders.

Still, McCausland has few qualms about some of the leftist Latin politicians who have come to prominence. "Unlike Argentina, Venezuela is the easiest country to fix," she argues. Vast resources in mining and industry make it a good long-term bet, she contends. She shrugs off Venezuela's socialist leader, Hugo Chavez, who is known for populist antibusiness policies that have slowed growth and sparked job walkouts. "Like the mumps, Chavez will go away," she says. Chavez's term is up in two years, and McCausland believes his successor will be more business-friendly.

"The time to invest is when things are out of order. If you wait for the next election, you'll pay," she adds.

In Brazil, Latin America's largest economy, financial markets and the currency, the real, have both tumbled, leading up to left-leaning Luiz Inacio Lula da Silva's majority showing in the recent presidential election. He is strongly favored to win an Oct. 27 runoff. A big concern is that he may give up the fiscal discipline imposed by outgoing Fernando Cardoso that is needed to service Brazil's $258 billion foreign debt and keep virulent inflation under control.

McCausland, however, suspects that da Silva will govern as a moderate. "Lula is saying privately that he wants to work with Washington and strengthen investment ties to the U.S.," says McCausland. Brazil remains a productive engine with a motivated work force. Brazil also has 200,000 M.B.A.s, she says. "Of course, I do not know if that is good or bad."

McCausland herself doesn't hold an M.B.A. At Morgan she ran into a starchy M.B.A. mentality that she finds distasteful. Like most banks, Morgan values teamwork, discretion and a British sense of decorum. Her ways clashed with its culture, to say the very least. McCausland loves the limelight and adores the creative turbulence of phones ringing and people panicking. "She thrives in tough, crisis-type situations," says Lorenzo Zambrano, chairman of Cemex.

In her Morgan days McCausland thought nothing of hiring a private jet to whisk her team to client meetings and holding lavish parties with champagne and caviar, all in the name of doing business. She once brought in a mariachi band to serenade her staff amid Morgan's hushed halls.

You can see why this freewheeling type prefers running her own business. Says James Robinson, chairman of Violy, Byorum and former chief of American Express: "She's the classic entrepreneur."