Latin America markets have come under pressure as investors have become more risk averse. News emana...
Latin America markets have come under pressure as investors have become more risk averse. News emanating from the US has been depressing, with the downturn likely to be wider reaching than previously thought.
Crucially, there has been a continued slowdown in the technology sector, with the Nasdaq surrendering all its earlier gains, while an unusually high level of negative earnings revisions are adding to the gloom in the financial market. Nonetheless, expectations of another rate cut by the Federal Reserve, unscheduled or otherwise, have limited the extent of the downturn.
The dramatic devaluation of the Turkish lira following a political row between the prime minister and the president which triggered a financial crisis forcing the abandonment of the crawling peg regime has led to the widening of emerging market bond spreads and hence increased volatility in equity markets. It is hoped the Turkish Government will move quickly to restore confidence in its commitment to implementing structural reform measures, which would be seen as positive by Latin America and elsewhere.
Difficulties in Turkey were quickly reflected in the Argentinean equity market, while in Brazil, the weakness of the real and higher than expected February consumer inflation suggest that the rate cuts the market had expected have been put on hold.
In Brazil, political tension in Brasilia has increased, possibly leading to delays in privatisations. More positively, output growth is expected to be good again this year, following the economy's recovery last year from the currency crisis of 1999. This has improved the public sector's fiscal balance and inflation has been well contained, helping the central bank to ease interest rates. Continued prudent fiscal policy, sound monetary management and improved competitiveness as regards its trading partners will support growth this year, although a stagnant Argentine economy could be negative for some Brazilian export sectors.
In Mexico, the gloom has been extended by an increasing current account deficit resulting from the US slowdown, although evidence of a bottoming out of US growth expectations should be taken as an encouraging sign. Following last year's robust economic growth, the economy is set to slow this year as the US slows and the oil price falls back. The trade balance may worsen as exports slow and oil prices fall. Tight monetary policy, in conjunction with the tight fiscal policy as promised by the new Fox administration, should keep inflation contained.
The main risks have a distinctly US flavour to them. Latin markets remain vulnerable to a US slowdown and will come under pressure if the pace of US rate cuts falters. A sharper than expected slowdown in US GDP growth could lead to larger contractions in growth rates in the region, most notably in Mexico.
Ashok Shah is head of emerging markets at Old Mutual Asset Management
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