Latin America is looking healthy - for now
By Mark Mulligan Financial Times | March 14 2005 http://news.ft.com/cms/s/bb77e464-942d-11d9-9d6e-00000e2511c8.html Latin America, prone to boom and bust, capital flight, political instability, corruption and regulatory inefficiencies, has never been for the faint hearted. // When Argentina defaulted on US$100bn (�5bn) of sovereign debt in early 2002, investors were ready to write off the region. Soon after, Brazil's risk premium widened to levels usually linked with default on the election of the so�­cialist, Luiz In�cio Lula da Silva. Now Latin America is back in vogue. And observers are venturing that deeper structural reform could flatten the traditional peaks and troughs in the longer term. "There have been noticeable efforts to move away from the old boom and bust pattern," says Seamus Lyons, fund analyst at Forsyth Partners. Latin American growth rates last year averaged 5 per cent, and a 22.5 per cent rise in the value of exports helped the region record its second annual current account surplus in a row. Currencies have strengthened against the falling dollar, to the point where governments in Mexico, Colombia and Brazil are considering issuing international bonds in local currencies. Relative political and macroeconomic stability, thanks largely to strong commodity prices and demand from China, is feeding consumer confidence and corporate results. Risk premiums on sovereign debt are slimmer than ever. Yield-hungry investors are piling into sovereign debt, mainly from Brazil, amid healthy appetite for medium-risk paper from developing countries. Reflecting this, Morgan Stanley's benchmark MSCI Latin American equity index has soared by about 135 per cent since the start of 2003, compared with a 95 per cent rise on the broader Emerging Markets index. Light-weighted Venezuela and Argentina have bounced back and the Colombian stock market last year surged 133 per cent in dollar terms, putting it among the top global performers. Although the rally in the heavily weighted Mexican and Brazilian markets may lose steam this year, investment managers and analysts remain bullish. David Dowsett, senior portfolio manager at Blue Bay, highlights the healthy external accounts and buoyant domestic demand and investment being enjoyed by most of the region's economies. "This has been backed up by sound political trends - with country variations, of course - and sensible fiscal management," he says. There is also caution, amid signs of monetary tightening in the US. The last important Latin American asset sell-off was in mid-2004, when comments from Alan Greenspan, Federal Reserve president, pointed to an interest rate hike. The spectre of a slowdown in Chinese demand and softening commodity prices hovers, too. Added to this, the ebbing fortunes of Vicente Fox, the Mexican president, and Mr Lula da Silva have put fund managers on their guard. "Brazil over the next six to seven years is a magnificent story," says Rupert Brandt, who runs the US$300m F&C Latin American Investment Trust, "but the market has tripled in value in dollar terms in the last two years and is vulnerable to a period of profit-taking." He has taken profits and cut his exposure in Brazil. Similar strategies are becoming standard in Mexico's equity market; investors fret about Mr Fox's room for manoeuvre on economic reforms. "Mexico is a good bottom-up story, but top down it's a bit of a political basket case at the moment," says Mr Lyons. These concerns are offset by the country's continued convergence with the US economy, in defiance of those who saw manufacturers dumping Mexico as a low-cost manufacturing base and decamping to Asia. "Mexico is by far the strongest conversion story in the world," says Mr Brandt. Analysts suggest the only dark cloud is a downturn in US consumer spending. Smart money is chasing good local corporate stories. Price-earnings multiples are cheap and efficiency gains forced by more than a decade of fluctuating credit and consumer conditions have built resistance at many companies. Many see profits growth continuing to outstrip gross domestic product for the next year at least, and are looking for value in market-dominating telecommunications and retail businesses, for example. "It will, of course, be far from a smooth ride," says Mr Lyons, "but the region should perform strongly again this year." ------------------------ Yahoo! Groups Sponsor --------------------~--> What would our lives be like without music, dance, and theater? 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