By Andrew Telfer, manager of the Baillie Gifford Latin American Fund History would suggest the be...
History would suggest the best time to invest in Latin American equity markets is often when economic conditions look bleak but a rebound is on the horizon. For much of the region, this description now fits.
The Mexican economy has reacted quickly to the economic downturn in the US. The reduced demand for exports has rapidly fed through to slower growth in domestic demand, allowing the trade account to remain remarkably healthy. Unlike in several previous slowdowns, the currency remains firm and inflation is subdued. This has put short-term pressure on much of corporate Mexico and has led to several high-profile bankruptcies among exporters. Despite this, Mexico's fundamentals look strong and it is well placed to bounce back to growth once the US economy starts to pick up.
Chile has been hit by weak prices of two of their main exports, copper and forest products. However, with the copper price below the cash production cost for many of the world's mines, output cuts are starting to balance the supply and demand equation.
Argentina's problems have been widely publicised for some time but the global slowdown has brought things to a head. After three years of recession and fiscal tightening, it recently announced a debt restructuring and a devaluation remains an uncomfortable possibility.
However, the Argentinian stock market is relatively small and corporate casualties are likely to make it even smaller. From an international investor's perspective, the main impact of Argentina's crisis has been to hurt sentiment towards the region and towards Brazil in particular.
As well as the Argentine situation, Brazil has been dragged down by other events that were outside its control but highlighted existing structural deficiencies. Lower commodity prices have hampered its attempts to narrow its sizeable current account deficit. Low rainfall has caused an energy crisis in their inadequate hydroelectric generation system. Slower capital flows have reminded foreign investors that Brazil's fiscal position is not as solid as it could be.
With the Presidential election next year leading to further uncertainty, this has led to currency weakness, excessively high interest rates and a slowing economy. However, a surge in global liquidity should help them to narrow their financing gap and return to growth next year.
Latin America remains a region dependent on exporting commodities and importing capital. This makes it especially sensitive to global economic slowdowns and sentiment in capital markets. After a difficult 2001, the region should find the external environment more supportive in 2002. This will be too late for a number of weaker companies, so investors need to be particularly selective at this point in time.
However, with stock market valuations still modest, and a large number of strong companies from which to chose, there should be plenty of opportunities for portfolio investors to profit from investing in the region.
Benefits from global recovery.
Commodity prices may be bottoming.
Valuations are attractive.
Argentina's problems not solved.
Vulnerable if global slowdown lingers.
Careful stock selection essential.
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