The economic crisis in Argen- tina has had a muted effect on other Latin American markets but the th...
The economic crisis in Argen- tina has had a muted effect on other Latin American markets but the threat of a contagion effect remains, according to First State Investment's fund manager Alan Nesbit.
'The future for Argentina is unclear because dollarisation, a strong labour movement and the limited manufacturing base all put it in a poor position to respond to a global upturn,' he says.
'Argentina is not much of a manufacturer and what it does export are dollarised commodities such as agricultural products, oil and gas. It will not sell more of these because of devaluation.'
For many investors Argentina is something of an exception in Latin America. They prefer to point to Mexico and Brazil both of which have manufacturing bases and flexible labour more easily prepared to accept reduced purchasing power, thereby allowing them to benefit from a return of global growth.
These countries are likely to be the region's winners, accord- ing to fund managers.
Over 12 months to 31 January, the Mexican Bolsa Index returned 6.63%, compared to a 28.02% fall in the Brazilian Bovespa Stock Index over the same time period.
'I don't think the benefits of devaluation will transform the trade picture in Argentina as it did in Brazil and Mexico and there is much more chance of it leading to inflation,' says Nesbitt.
Contagion to other Latin American markets has proved to be muted and sentiment in the region has not been too badly affected by events in Argentina.
'There was a big rally in Brazil in the final quarter of the year because people saw Argentina as finished,' says Nesbitt. 'Since everyone saw it coming, only a few speculators had investments there and so there was little contagion.'
Framlington emerging markets fund manager Jonathan Asante is also optimistic on Brazil and Mexico, although he does have slight concerns about Brazil because it is an election year.
'We used to be very underweight Mexico,' he says. 'But the economy is looking better and Mexico is now basically a proxy for the US, which is obviously a bull scenario for the smaller country.
'Although Brazil is cheap and we think the risks are fully priced, in this an election year. On the one hand, I think they could do a Mexico and change their government but keep their economic policy intact, but it could go the other way.
'Brazil is certainly looking good if it gets through this and we are looking to go overweight in both in the future.'
James McLellan, US fund manager at Clerical Medical, was surprised by the lack of market contamination from Argentina.
'It did have some effect last year, with Brazil selling off throughout the year matching Argentina,' he says. 'However, Mexico was a rock last year and Brazil rallied strongly off the lows ' it has not collapsed on devaluation, at least not yet.'
He is mostly invested in Brazil and Mexico in Latin America, as he believes these are the broadest and deepest markets in terms of available investments. His major holdings include brewers, banks, cement companies, telcos and oil companies.
Investment strong in Brazil and Mexico.
Contagion from Argentina is muted.
Write-off improved sentiment in region.
Argentina has little by way of manufacturing.
Election year in Brazil.
Strong labour movement in country.
Putting the tech into protection
Square Mile’s series of informal interviews
Fallout from Haywood suspension
Launching later in 2019
£80bn funds under calculation