On the back of Telefonica Argentina's take-out by Telefonica Espana, Argentina has been the best per...
On the back of Telefonica Argentina's take-out by Telefonica Espana, Argentina has been the best performing market in Latin America, year to date.
But its economy remains weak and fiscal performance is poor. Growth in earnings is likely to disappoint. Valuations are relatively unattractive. And this year's IMF targets are unlikely to be met.
If that is the case then is it time to turn our backs on Latin America as a whole, and to find better opportunities elsewhere? Certainly not. We continue to focus on the two markets in the region which offer compelling investment opportunities, Mexico and Brazil.
Surprisingly, July's elections in Mexico were calm. Victory for Vicente Fox and his Pan party overturned 70 years of political domination by the PRI. Fox's positive rhetoric is effective. Consumer confidence is picking up, and the economy is strengthening. Growth in GDP for the second quarter of 2000 was 7.6%, some 0.4% ahead of consensus, and with the exception of Telmex, where margins disappointed, second quarter earnings were better than expected. Fox is pro-market, in favour of privatisation and for fiscal responsibility.
While the macro-economic picture is enticing, we have slight reservations for the short term. The strength of GDP creates some risk. To maintain its target of inflation convergence with the US, Mexico's central bank is tightening monetary policy. It is also watching real wage increases, tight capacity and the strength of the peso.
Against this background, we are reducing our weighting to Mexico.
With the proceeds we are increasing our weighting to Brazil. In contrast to Mexico, interest rates in Brazil are coming down. Although real rates are the lowest they have been for 15 years, at 8.5-9.0% they are still high.
Brazil's economy continues to recover steadily, although some nervousness still surrounds interest rates. Rumours of a political scandal, which some feared might involve the president, continue to overshadow the market and are preventing it from achieving its full potential. Nevertheless local investors are starting to return. Foreigners, we believe, will follow soon.
Electric utilities is an area for which we have great expectations. Netting us a return of 16%, the recent Petrobris deal is a clear example of the opportunities available in Latin America.
Volumes across the region have been low throughout the summer, less than a quarter of the normal average in Brazil. But the economic news is generally positive and valuations remain persuasive. For the most part, it is global volatility which is holding back Latin American markets. Once a soft landing becomes consensus in the US, we are convinced we will see the region deliver on its promise.
Jean de Bolle is director and head of the emerging markets at Martin Currie
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