Latam Consumer Monthly:Is sector rotation in Latam consumer space imminent?(September 2017)

Brazilian discretionary retailers continued to soar...

    In August, 75% of our covered stocks showed positive returns, while only 54%outperformed their respective indices. Brazilian retailers BTOW3, ARZZ3,HGTX3, NATU3and LAME4led the way, followed by most of the Brazil-basedprotein producers (all with double-digit dollar returns). Year to date, LatAmFood, Beverages and HPC stocks are trailing their respective country indices by24%, 3% and 5% on average (respectively), while Retailers are outperformingby 11% (despite underperformance in four out of six food retailers).

    …but after an 18-month rally (and end of BR recession) it may be time to swap

    The noticeable difference in the performance of discretionary versus defensivenames in the broader Latam consumer space, combined with the official endto the long Brazilian recession, suggests to us that a sector rotation is due oneof these days. Our only Buy-rated Brazilian retailer is CBD, and would be themain beneficiary of a swap out of early-cycle into later-cycle plays. ABEV isanother obvious choice, but in our view investors have jumped the gun on thisstock (that we continue to rate Hold). For those investors who want a cheaperway to play the incipient recovery in Brazilian beverage consumption, wesuggest AKOb.N, as Coca-Cola Andina derives more than a third of its salesfrom Brazil (and its other franchise territories are also at the cusp of recovery).

    Among Brazilian names, our other Buy-rated name is BEEF3, as the recovery inlocal demand coupled with a positive cattle cycle and rising exports shouldbode well for FCF generation that would in our view drive significant upside forthis deleveraging story.

    Monthly Feature: notes from last week’s GEMS conference

    The following LatAm consumer companies participated in DB’s annual GEMSconference in New York: Coca-Cola FEMSA, FEMSA, Arcos Dorados, GrupoBimbo, Liverpool, Kimberly-Clark de Mexico and Cencosud. Inside we includesummaries of key points for each company.

    Brazil protein export trends continue to move in the right direction

    The negative impact of the Carne Fraca scandal that broke in late Marchcontinues to reverse. August SECEX data showed a beef export volumeincrease of 49% (albeit on an easy comparison of -7.7% in Aug. 2016) to reacha 10-year high in absolute terms; similarly, poultry volume grew 16.4% (but ona less-easy comparison: -4.6% in Aug. 2016), reaching an 11-month high. Beefpricing fell by 0.5% yoy (i.e., was essentially flat) after ten months of increaseswhile poultry pricing also remained flat after a 2.0% fall in July (which in turnfollowed ten consecutive months of increases). Pork volume grew just 2.4%,but positive pricing trends continued (i.e., rising for the eleventh time in32months on a yoy basis).