Three emerging market gems to snap up now

Global emerging markets are hotting up this year. And Brazil is leading the way, says professional investor Kumar Pandit. Here, he picks three Latin American stocks to buy now.

Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Kumar Pandit, senior Latin America analyst, Somerset Capital Management.

Freezing conditions may be sweeping across Europe, but things are hotting up in global emerging markets (GEMs). Last week, fund data firm EPFR stated that GEM funds attracted their highest weekly inflow since 2002. Brazil illustrates why.

As a key GEM economy, Brazil has recently overtaken Britain to become the sixth largest in the world. The capital, Sao Paulo, hosts a sea of skyscrapers that epitomises the growth and economic development of the country. I was in the city recently business is good and the malls are crowded with shoppers from a growing middle class.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

There are many domestic companies to invest in, as well as the global commodity companies that make up more than 45% of the Bovespa index. Interest rates have been cut to 10.5% (from 12.5% in August 2011), with inflation falling to 6.25%, which suggests the monetary policies implemented to keep the economy growing are working. So which companies will thrive? Here are three I currently like.

The first is Sabesp (US: SBS), a water utility in the state of Sao Paulo, which is cheap on a price/earnings (p/e) ratio of 11. After years of uncertainty surrounding tariff regulations and a lack of rules for water utilities on what constitutes a fair return, Sabesp is now making headway with the regulatory authorities.

Plans are firmly on track to introduce a regulatory framework by September 2012. This should provide Sabesp with a clear tariff methodology that allows it to make decent returns on its infrastructure investments.

Brazil's electricity utilities saw similar regulatory changes in 1996 and 2004 and now trade at higher multiples and also yield high dividends a possibility for Sabesp in the longer term.

Another Brazilian stock we like is Gerdau (US: GGB), the largest producer of long steel (mainly used in infrastructure and construction) in Brazil, with operations in America.

The steel sector in Brazil fell out of favour with investors in 2011, particularly as concerns over pricing and demand for flat steel were at the forefront of downside risks. Gerdau's long steel, though, gives exposure to a fast-growing construction sector.

A helpful catalyst will materialise during the run up to the World Cup 2014 and the Olympic Games 2016, when the government will make substantial upgrades to infrastructure spending to the tune of an estimated $26.8bn. Gerdau is also a trusted steel supplier for Brazilian house builders.

This allows it to tap an expanding real-estate sector serving a country with a housing deficit of six million properties. The stock trades cheaply on a price/book-value ratio of 1.2, well below its four-year historic average of 1.8 times.

The Mexican market also provides interesting opportunities. We continue to like Femsa (US: FMX), despite its rich valuation (it's on a p/e of 21). The company has Coca Cola bottling operations throughout Latin America, as well as a fast-growing convenience store business operating under the Oxxo brand.

The Oxxo chain is rapidly expanding across Mexico and is the third-largest retailer in terms of revenue. With $5.5bn in sales and almost 9,000 stores, Oxxo is challenging the traditional Mom and Pop' stores and giants such as Walmex in the food retail space.