Investors Are Invading Latin America --The region's stocks and bonds are red-hot -- for now
How long can it last? That's the question investors are asking as they watch the torrent of portfolio money rushing into Latin America this year -- a surge on a scale not seen since early 1998, before the Russian currency crisis pulled the plug on emerging markets. Top of the heap are countries that just a few months ago were dismissed as lost causes: Argentina, reeling from the shock waves of a debt default and devaluation, and Brazil, where the prospect of a left-wing victory in last October's presidential elections had Wall Street in a panic. Many analysts were telling their clients to get out while they could.
Now it seems investors can't get back into Latin America quickly enough. Inflows into emerging-market bond funds, where Latin America commands at least a 50% weighting on average, reached $1.95 billion in the year to May 21, according to EmergingPortfolio.com, a Boston fund-research company. That's more than three times the $648 million they attracted in all of 2002. "A lot of people have made a lot of money" by betting on Latin America, says EmergingPortfolio's managing director, Brad Durham. "And they believe there is a lot more to make." Right now the region certainly offers some of the planet's juiciest returns. Brazilian bonds have surged nearly 42% in the year to May 27, as measured by J.P. Morgan Chase & Co.'s emerging markets bond index. By comparison, the U.S. high-yield debt market has returned 15%. With deflation looming in Japan, Germany, and now the U.S., institutional investors are hunting for yield. Latin America has become one of their favorite stalking grounds. While 10-year U.S. Treasury bills carry yields of 3.3%, Brazil's government paper offers more than 11% and Venezuela's 14%. The region is also benefiting from improving fundamentals. Brazil, the highflier of recent months, has come back from the brink of debt default and produced a run of record monthly budget surpluses, reassuring investors its economy is back on track. The economies of Peru, Colombia, and Chile are also growing faster than those of the developed world, while Argentina's has staged a remarkable recovery. While Latin bonds have led the way up, equities are going along for the ride. The Merval, the index of the Buenos Aires stock exchange, has climbed 48% in dollar terms since the start of the year, making it the top-performing stock market worldwide. Brazil's Bovespa is not far behind, up 37%. Even some of the region's smaller bolsas are showing gains: The Lima Stock Exchange is up 30%. Like bonds, the region's bourses are bouncing back from some deep lows last year. The surge has been led by local investors. International flows are still negative for the year, says EmergingPortfolio, a sign that many are still leery of putting their money in Latin companies, which often show little regard for the rights of minority shareholders. Indeed, the recent rally is hardly a sign that Latin America is safe for investors. "When a big tide comes in, it takes all boats up with it," says Mohamed El-Erian, who oversees $11 billion in emerging market bond funds at PIMCO, the Newport Beach (Calif.) investment company. "Then you notice that some have holes in them." El-Erian is bullish on Brazil, where the new administration is pushing reforms of the pension and tax systems that would put public finances on a firmer footing and boost efficiency across the economy. But he's staying clear of countries such as Argentina and Venezuela, where the direction of economic policy is uncertain. One worrying sign is that foreign direct investment by multinationals into Latin America has not kept pace with the rush of portfolio capital. No matter how big the tide, it has to ebb. "Emerging markets move in five-year cycles, while in the U.S. it's 10 years," notes emerging-markets veteran Mark Mobius, who as managing director of Templeton Asset Management Ltd. oversees some $7 billion in assets. A rate increase in the U.S. would probably trigger a rush back to the comparable safety of U.S. Treasuries, says EmergingPortfolio's Durham. Further deterioration in the global economic environment could also trigger investment outflows, given Latin America's heavy dependence on commodity exports. In short, investors better keep their life jackets handy.
By Jonathan Wheatley in São Paulo