Among the emerging markets, Latin America is sometimes neglected but the region certainly merits con...
Among the emerging markets, Latin America is sometimes neglected but the region certainly merits consideration.
From an investment point of view, Brazil and Mexico dominate the region but there will always be some interest in the smaller markets, although currently only Chile is worth considering.
Bordering, as Mexico does, for over 2,000 miles along the US, its fortunes are clearly interlinked with those of the US. Indeed since NAFTA was implemented in 1994 trade with the US and Canada has almost doubled. The Mexican recovery, now in its fourth year, will likely continue benefiting from the large rise in the oil price.
The banking sector remains in bad shape, probably worse than is acknowledged by the Government, but despite this we expect the economy to register in excess of 3.5% real growth this year helped by further increases in consumer spending.
As in the past, the forthcoming election will no doubt give cause for concern but it does appear that the current president will be leaving the economy in reasonable shape and that the cyclical crisis will be avoided on this occasion. These factors along with increasing foreign direct investment clearly indicate that Mexico is on the road to investment grade status and makes investment there very attractive
Last January, the turmoil in the emerging markets of the Far East and Europe finally caught up with Latin America and forced a Brazilian devaluation despite the very high level of interest rates. However, dire forecasts for the Brazilian economy were shown to be way off the mark and the stock market has bounced back.
Inflation has come down much faster than expected allowing interest rates to fall and there is still some room for them to fall further this year and next. Fortunately, a trade war within the Mercosur has just been avoided with Argentina backing down over import controls.
Fiscal reform is needed and President Cardoso has shuffled his cabinet so as to ease passage of the legislation through Congress. One very positive outcome from the problems in January was the eventual appointment of Arminio Fraga to the Central Bank. Fraga appears to understand Brazil's problems and is prepared to be actively involved in helping to put them right even beyond the role of that of a central banker.
Investors will need to track government spending in the hope that rumoured cuts in the areas of healthcare and the federal payroll are forthcoming. Against the background of lower interest rates and new fiscal responsibility we view the Brazilian stock market to be attractive even after its sterling performance so far this year. Companies with low levels of dollar debt have done well and we expect them to continue to do well along with the best of the telecom operators.
The Chilean market has often tended to perform more in line with Pacific Basin markets. In truth, however, the market is very closely correlated to the copper price which is in turn influenced by demand out of the Far East. Interest rates have been cut aggressively and further cuts are expected against a background of inflation which should average out at around 4.5% in 1999. Against this background and our expectation of commodity prices firming further we would overweight Chilean exposure.
Generally the economies in the region have recovered sufficiently for the US Federal Reserve Board to act in line with its own domestic needs. We expect US interest rates to rise only by the amount needed to keep real rates unchanged. With this background, investing in Brazil and Mexico should be profitable.
Anthony Arnold is a fund manager at AXA Sun Life.
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