Fund managers are changing their focus in Latin America as previous untouchables start to recover an...
Fund managers are changing their focus in Latin America as previous untouchables start to recover and old performers begin to look jaded.
One example is Argentina, which is starting to sort out its debt problems since it defaulted back in late 2001. James Gotto, Schroder's Latin American manager, has begun to increase his exposure towards the country in favour of Brazil and Mexico.
Gotto says: "Stock markets have continued to perform well with the MSCI Emerging Market index up 9.9% this year to 13 July compared to the MSCI World index (up 1.6%) and Latin American markets have been particularly strong. Latin American equity markets provided excellent returns in the second quarter, despite a cautious start.
Gotto says "Issues contributing to the performance were perceptions that US interest rates are less likely to be raised aggressively, a temporary easing of political tensions in Mexico, strength in the Brazilian currency and positive progress on dealing with Argentinian debt."
Looking ahead, Gotto is reducing his target exposures for Brazil, where the economy is weakening, partly under the burden of high real interest rates, and Mexico, where valuation growth is unexciting and political tensions are likely to return. Gotto is increasing exposure to Argentina, where progress on the debt deal promises to unlock potential in equities, supported by attractive valuations and strong earnings growth.
WestLB Research is also taking a more cautious view of the growth prospects in Mexico and Brazil this year. In Mexico the company has reduced its forecast from 4% to 3.3%, largely because of weakness in manufacturing, despite a boom in oil markets reflecting both cyclical and structural factors. The main cyclical factors have been the deceleration in the US manufacturing sector and the appreciation of the Mexican currency. Among the structural problems are the lack of competitiveness in the auto sector and inadequate infrastructure.
In Brazil, WestLB Research has reduced its 2005 forecast from 4% to 3%, largely because monetary policy was tightened more than the company expected earlier this year. Declining industrial production, weak domestic demand and low levels of investment had an effect. However, WestLB Research thinks falling interest rates in the coming months will help boost growth back to the 4% level next year.
Humphrey Carey, head of emerging markets, at F&C Asset Management, says: "Despite the recent run-up in emerging market stocks, we anticipate that the second half of the year will see further weakness. In Latin America we remain concerned about political elections. We had anticipated that there would be negative newsflow as the campaigning season got under way and this has begun to feed through with a scandal in Brazil involving the purported buying of congressional votes."
However, Standard Life has a more positive view on Latin America. According to Ronnie Petrie, head of global emerging markets at Standard Life, a domestic recovery is beginning in Brazil. Retailers have benefitted from higher disposable income and rising gross margins on imported goods. Employment is also robust. Brazil has also benefited from a higher oil price.
Petrie also feels Mexico is a domestic demand story, following the housing boom.
Petrie thinks the profit margins on Brazil's export sector looks squeezed following the appreciation of the currency. But the real's rise does signal an amber light for exporters. He says the low-end manufacturing industry in Mexico is being squeezed by Chinese competition in the US import segment.
The view that US interest rates won't rise strongly is aiding performance.
Argentina seems to be recovering from its 2001 currency crisis.
Mexico's GDP growth may fall and Brazil's political problems could cause volatility in the markets.
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