Is now the time for investors to revisit Latin American equities? It could be argued that such a tim...
Is now the time for investors to revisit Latin American equities? It could be argued that such a time of serious pessimism offers an excellent window of opportunity to take a stake in what is a growing and evolving region.
While Argentina and its threatened collapse, default and devaluation hold the headlines, it could be argued that the possible impact on the region is close to being fully discounted, except for short-term impact in Brazil.
Empirical data suggests that Latin American equities do well in a period of global recovery and even anticipate the end with outperformance as experienced in the 1990-91 US recession. Therefore, when we see a pick-up in the US or strong signals from G7 indicators, Mexico in particular, because of its close links to the US, should rebound strongly.
Additionally, commodities should see a rapid return of demand and therefore benefit this commodity-driven region.
On virtually all measures, the region shows very cheap valuations compared with developed market peers ' in many cases below the worst levels of 1998. It is not impossible to find quality stocks trading below one times book value and at or below replacement cost.
Mexico is converging with the US over time and moving towards official investment grade status for 2002. The present global downturn has shown Mexico in its first 'business cycle' as it tracks the US with a decreasing lag replacing the previous experiences of downturn through financial crisis.
Investment structures within the region are set to change. Corporate governance leaves much to be desired and therefore offers considerable upside for equities as it improves, driven by legislation and S&P's new corporate governance ratings.
Demographics dictate that the region's young population will soon move into prime saving years, providing local pension funds with significant resources to invest in equities. Pension fund assets in Brazil, for example, have grown from $7.6bn in 1985 to $68bn in 2001.
However, the current global downturn could last much longer and be of greater magnitude than consensus suggests. Such a serious recession could introduce deflation, which would be especially painful for a commodity-exporting region.
The Latin American asset class continues to shrink. Corporate consolidation and the retreat of dedicated funds have tangibly reduced liquidity.
With Mexico and Brazil now the only two Latin markets of any size to appear in global indices and correlation with developed markets rising, the ability and need to invest in the region for diversification continues to erode.
A collapse in Argentina could deliver a major blow to risk tolerance across emerging markets and herald rapid, extensive and long-lasting investor flight. Such a withdrawal and deterioration of well-functioning capital markets could see a region retreat into previously experienced crisis mode, thus revisiting political instability, volatile currencies and third world fiscal accounts.
Pessimism offers opportunities.
Cheap valuations are on offer.
LatAm asset class shrinks.
Cheap valuations are on offer.
Richard Keery is a member of the LatAm desk at Edinburgh Fund Managers
100 new clients
Achievements, charity work and other happy snippets
Square Mile’s series of informal interviews
Partner Insight: The rise in demand for DFM and multi manager solutions has been largely driven by new mandates from the regulator, says James Bampton, head of UK intermediary distribution at Architas