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 Business News | August 2007 
Latin American Markets Show Resilience Amid Global Tumult
 Alexander Ragir & James Attwood - Bloomberg
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In the mid-1990s, the Brazilian stock market took almost two years to recover from the 61 percent drop in the Bovespa index caused by the devaluation of the Mexican peso.
This year, the Bovespa came back in six weeks from an 11 percent decline in February after a stock sell-off in China spread across the world. The Chilean and Mexican markets showed similar resilience.
One reason Latin American stocks are bouncing back faster: The number of local investors has increased, making trading "more robust," said Paulo Leme, managing director for emerging markets at Goldman Sachs Group. New rules that allow investors to buy shares more easily across the region will support stocks as local fund managers seek bargains after the sell-off this month.
"The market liquidity increases, so you're less prone to see overshooting of prices and huge collapses in prices," Leme said.
With the Brazilian index off 15 percent since July - this time because of U.S. subprime mortgage concerns - fund managers like Eric Conrads of the AFP Santa Maria fund in Chile, and Ricardo Malavazi of the Petros Fund in Brazil, plan to buy.
Stock investment by Latin American pension funds, mutual funds and insurance companies jumped fivefold in the past four years to $286 billion, according to Merrill Lynch. That compares with $111.3 billion invested in regional stocks by international funds tracked by Emerging Portfolio Fund Research, based in Boston.
Local investors helped "stabilize" the Bovespa last year by buying stocks when foreign investors fled riskier assets from May to September, Thierry Wizman, an emerging market strategist at Bear Stearns, wrote in a note to investors in March. When the market surged to new highs from October 2006 to January 2007, domestic investors were net sellers of equity as the price increases raised the percentage the stocks represented in their portfolios, he wrote.
Not only do local investors cushion share swings, they are driving a trend toward stock market integration throughout the region, Wizman said in an interview. Regulators in Chile, Brazil and Mexico have eased rules this year on stock buying and investing outside their home countries.
"The first place they would look would be in the region," said Alex Ingham, an emerging market fund manager at Morley Fund Management in London. "It's what they're familiar with."
Chilean regulators passed legislation this month to allow pension fund managers to invest 35 percent of their assets abroad. Lawmakers are discussing eventually loosening the limits to 80 percent as part of a package of changes in the retirement system proposed by the Chilean president, Michelle Bachelet.
Brazilian regulators approved a rule in May allowing pension funds to invest as much as 20 percent of their assets abroad and doubled the percentage that these funds could hold in so-called multimarket funds, which include stocks.
In Mexico, where pension funds known as Afores were prohibited from buying stocks before 2005, regulators in April doubled the allowable limit of equities, both foreign and domestic, held by pension funds to 30 percent of total assets. The Mexican stock exchange has signed agreements with its counterparts in Chile, Brazil, Colombia, El Salvador and Peru allowing local investors to trade shares there.
Tonatiuh Rodriguez, a fund manager at the Afore XXI pension fund in Mexico City, said he planned to reach the new cap on equity investment about a year after the changes take effect in January.
"Private pension funds have been hiring people with expertise in equities and risk management," Rodriguez said. "The moment the funds have a chance to take advantage of the new law, they will quickly reach the limit."
James Attwood reported from Santiago. |
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