Hot, Healthier Latin Markets Attracting Cash
The rain of dollars falling on stocks worldwide has become a virtual torrent in Latin American markets this year. And many pros see further significant gains ahead for the region’s shares, as global investors swarm there.
On Tuesday, the Mexican stock market’s Bolsa index jumped to yet another new high, rising 56.77 points to 2,881.17. While most major world markets plunged on Monday in the wake of the U.S. market’s Friday tumble, Mexican stocks all but ignored Wall Street’s slump.
The Bolsa now is up 10.7% so far this year, versus a mere 1% rise in the U.S. market’s Standard & Poor’s 500-stock index.
The ever-volatile Brazilian market also has been red hot this year, with prices rocketing 40% in dollar terms. In Argentina, the Buenos Aires market is up almost 14%, while Chilean shares have soared 25% on average, according to Morgan Stanley Capital International.
The Latin American bourses’ gains are in sharp contrast to the plunge in many smaller Asian markets this year, which have been hit hard by profit-taking after surging in 1993. Hong Kong’s Hang Seng stock index, for example, is off 4% this year; Thailand’s SET index has plunged 19%.
In fact, Latin America is benefiting directly from the trouble in Asian markets, many money managers say. “I think what happened is that a lot of Asian markets reached very expensive valuations at the end of 1993,” says Josephine Jimenez, co-manager of the Montgomery Emerging Markets stock fund in San Francisco.
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So when global investors looked around for better ideas as 1994 began, Mexico, Brazil, Argentina and other Latin markets stood out, Jimenez says. Brazilian stocks, for example, were trading at about 14 times estimated 1994 earnings per share when the year began, even after rising sharply in 1993. In contrast, some Asian markets were priced at 30 or more times ’94 estimates.
What’s more, with the Federal Reserve’s decision last week to tighten credit, global stock managers appear to view Asian markets as net losers and Latin markets as net winners. The reason: Some Asian nations tie their currencies to the dollar, effectively tying their interest rates to U.S. rates, too. Meanwhile, Latin American interest rates are already high, so Wall Street sees room for them to drop even if U.S. rates inch up.
At the same time, the Fed’s new stance boosted belief in the vitality of the U.S. economic boomlet, which will inevitably help pull up Latin American economies as well.
Indeed, the real appeal of Latin markets lies in the promise of continuing economic rebirth after the “lost decade” of the ‘80s. The spread of democracy, business privatization and open capital and import-export markets has created vast new investment potential in Latin America, and that is what global money managers are responding to.
Passage of the North American Free Trade Agreement in November helped refocus investors not just on Mexico, but on all Latin economies.
Investors used to buy Latin stocks simply because, while risky, they were cheap, says Gilman Gunn, manager of the Boston-based Keystone Fund of the Americas, which invests in U.S. and Latin stocks. Now, he says, “We have a situation where the valuations are less compelling, but the risk is much less as well”--because the economic turnarounds in Mexico, Argentina and Chile are for real. Brazil, Wall Street hopes, is next.
Of course, buyers of Latin American stocks shouldn’t forget that these still are young--and very volatile--markets. Political problems are ever-present, as demonstrated by the rebel uprising in Mexico’s Chiapas state in early January.
Neil Perry, research chief at Baring Securities in Mexico City, says Mexican investors still are quite worried about the Chiapas affair, even as foreign investors continue to pour into Mexican stocks. After the uprising, Perry says, nine Mexican brokerages advised their domestic clients to sell stocks, while foreign brokerages saw the market’s brief slide as a great time to buy.
So far, the foreigners have been right. But then, the sheer volume of money fighting to get into Mexico and other Latin markets may guarantee that foreign optimism is a self-fulfilling prophecy.
Consider: Paul Wargnier, manager of the Dean Witter/Trust Co. of the West Latin America fund in Los Angeles, saw $38 million in cash flow into his fund in December from individual investors. In January, the inflow was a stunning $70 million. The fund’s assets currently total $333 million.
At some point, Latin markets will probably face the same problem the Asian markets now face: overvaluation and heavy profit taking. But with the spotlight having shifted back to Latin markets only recently, their economies set for growth and U.S. investors ravenous for foreign shares, these markets have momentum in their favor.
The Latin Funds
Here are mutual funds that target Latin American stocks. Note that most of these funds levy a redemption fee if you exit before a set period of time has passed.
Total return: Fund (phone number) 1993 1994 GT Latin America A (800) 824-1580 +52.9% +16.7% Scudder Latin America * (800) 225-2470 +74.3 +14.9 Dean Witter/TCW Latin Amer.* (800) 869-3863 +46.8 +14.1 Merrill Latin America B * (800) 637-3863 +63.1 +12.3 UST Emerging Americas (800) 233-1136 +40.9 +10.6 Fidelity Latin America* (800) 544-8888 NA +10.2 Keystone Fund of Americas B* (800) 343-2898 NA +6.9
1994 data through Monday.
* Indicates no-load fund. GT Latin America fund is also available in no-load form.
NA: Not available (fund was new in ‘93)
Source: Lipper Analytical Services
