Latin American stock markets outperformed the major developed markets in the first quarter, rising...
Latin American stock markets outperformed the major developed markets in the first quarter, rising 2.8% in sterling terms according to the MSCI Latin America Free Index.
All in all, the region appears to be holding up well in the face of the US slowdown, and given the attractive stock market valuations that Latin America currently offers, we anticipate continued outperformance from the region when sentiment in the US improves.
In particular, Mexico and Brazil continue to offer excellent investment opportunities, thanks to the strength of their economic revivals since the emerging markets crisis of 1998 and the devaluation of the Brazilian real in 1999. Mexico is perhaps more exposed to a US economic slowdown but so far its economy has withstood the pressure.
Like Mexico, Brazil's fortunes have ebbed and flowed over the last three months. Interest rate cuts in January helped push the BOVESPA to a nine-month high, only for a rate rise in March (to protect the currency after it fell to a two-year low against the US dollar) that led to subsequent underperformance.
But, while Mexico and Brazil look increasingly like developed economies, Argentina is becoming steadily less predictable, and it is here where any internal upset to the region as a whole may originate in the coming months.
Argentina is the largest net borrower in the emerging debt market, where it pays 800-900bp over US Treasuries to roll over its debt, and its economy has been in or near recession for more than two years. Moody's decision to downgrade the country's sovereign debt rating from B1 to B2 has increased these borrowing costs. There are few policy options left to spark economic growth and generate the cash needed to meet debt repayment obligations.
The newly appointed finance minister, Ricardo Lopez Murphy, brought about massive protests in March in response to his $4.5bn austerity plan designed to raise the cash to repay the country's debts.
A fortnight after his appointment he was replaced by Domingo Cavallo, the man responsible for introducing Argentina's currency peg with the US dollar nearly a decade ago.
Cavallo's plan is to restore health to the public finances by focusing on better tax collection and a range of economic reforms. It is regarded as 'softer' than the Lopez plan, since its goals are less transparent, but it has a distinct advantage since it is more likely to gain political support.
Early signs are encouraging, and investors have recently been boosted by the news that Argentina had sold bonds worth $4.6bn to help finance debt repayments, thus reducing concerns of a default. But nervousness remains, as a default would be extremely damaging to the investment reputation of Argentina.
Rick Schmidt is a fund manager at Chase Fleming Asset Management
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