Fearing the Worst for Latin American Issues
As Latin American stock and bond markets continue to plummet, big-money U.S. investors are torn between a belief that bargains are rampant in those markets and a fear that the worst is yet to come.
So far, fear still has the upper hand in that struggle: Many U.S. institutional investors are staying on the sidelines.
“It’s just very, very difficult to call a bottom in a situation like this,” said Soraya Betterton, whose San Francisco-based GT Global Latin America stock mutual fund has lost nearly 19% of its value since Jan. 1, on top of a 20% fourth-quarter drop.
In a sign that yet another selling wave may be imminent, Betterton said individual investors have begun to cash out of her fund, after sitting patiently for weeks as Latin markets slumped.
About $20 million has exited the $400-million GT fund this week, Betterton said. If that outflow balloons, she could be forced to liquidate more of her holdings in an already sliding market. “The big fund companies haven’t seen much in redemptions yet” from Latin funds, she warned. “You can’t really expect a bottom until we have that wave of redemptions.”
Indeed, small investors’ ability to withstand losses in Latin and other “emerging” stock markets over the past year has stunned mutual fund experts, but few
believe that goodwill can last. The instinct to avoid annihilation, after all, is a strong one.
For many investors--large and small--this clearly isn’t just another annoying bout of profit-taking in what are always volatile Third World markets.
In the Mexican debt market, yields on short-term bonds have soared far beyond “junk” status. The Mexican government on Tuesday agreed to pay a record 20% interest (annualized) on 28-day dollar-denominated notes, and rates on short-term peso-denominated debt rocketed as high as 56.5%.
Latin markets also stumbled last spring, victims of fallout from the Federal Reserve Board’s initial interest rate hikes. But in that market plunge, few on Wall Street were questioning the long-term viability of Latin America’s economic rebound.
This time, faith in that fundamental story has been shaken by the severity of Mexico’s financial crisis: a dramatically devalued currency that is groping for a bottom, deepening bank liquidity problems and a growing sense that too much of the Mexican revival story, in particular, was based on flimsy assumptions about that economy’s true near-term potential.
Mexico’s Achilles’ heel has always been its dependence on foreign capital to fund its growth, a problem many of its Asian rivals don’t have. First World investors essentially fueled the Mexican economic miracle of recent years by providing capital. Now, for many reasons, they are taking it away again--and there is nothing to fill the void.
Mexico is resorting to outrageously high interest rates to lure investors back, but those rates in turn are killing local businesses and threatening a vicious downward spiral of a weaker economy, a weaker currency and weaker markets. The broader worry is that Brazil and Argentina are next in line.
Of course, the history of Latin America--and of all emerging markets--is one of booms and crashes. Nothing has really changed, some Wall Streeters say, except that a new generation of investors is learning or relearning about risk, the hard way.
Tom Robinson, international strategist at Merrill Lynch in New York, warns that just as too many U.S. investors were caught up in the euphoria over Latin stock markets a year ago, “now you have to guard against becoming too pessimistic” on the future.
Maybe Telmex, the Mexican phone giant, never was worth the $76.13 a share that some investors paid at the peak in 1994. But with the stock now down 56%, to $33.38, the next logical question to ask is at what price the market grossly underestimates Telmex’s future, Robinson said. “At some point the market is going to conclude that these assets are too low-priced,” he said.
But when? With Mexican issues, “You can argue (rhetorically) that these stocks can go to zero from here,” says David Herro at the Oakmark International fund. But then, zero usually never arrives. “I think we’re at the point where one should definitely start buying,” he said. “These stocks are priced as if the companies are going to dry up and blow away.”
Many other investors, however, believe that there’s no reason to hurry on the buy side. “The smart money just doesn’t get in the way when unsophisticated money is selling,” said John Liegey, whose Weston Group tracks emerging-market bonds. The smart-money perception, he said, is that there still are plenty of investors who want out of Latin America.
* CAPITAL FLIGHT
Investors flee Mexico, with shock waves spreading. A1
* TEQUILA EFFECT
Latin markets suffer. D3
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Latin Meltdown
How U.S.-traded shares of key Latin American companies and investment funds have plunged over the past year:
Telmex
1994 high: $76.13
Tuesday: $33.38
Brazil Fund
1994 high: $36.88
Tuesday: $25.67
Empresas ICA
1994 high: $34.50
Tuesday: $9.63
Coca-Cola Femsa
1994 high: $38.38
Tuesday: $20.25
Argentina Fund
1994 high: $19.63
Tuesday: $10.38
Vitro
1994 high: $27.75
Tuesday: $10.75
YPF (Argentina)
1994 high: $29.63
Tuesday: $19.88
Note: All stocks traded on the New York Stock Exchange.
The Losses Deepen
How some mutual funds that focus on “emerging” stock markets fared in 1994 and estimated declines so far this year:
Total return: Fund 1994 1995* Fidelity Latin America -23.2% -20.0% TCW/Dean Witter Latin Am. -23.7 -18.9 GT Global Latin Amer. A -6.6 -18.8 Scudder Latin America -9.4 -17.7 Fidelity Emerg. Mkts -17.9 -10.8 GT Global Emerg. Mkts A -3.8 -9.6 Montgomery Emerg. Mkts -7.7 -8.3 Templeton Devel. Mkts -8.6 -5.5 Invesco Pacific +4.7 -3.3 Merrill Lynch Pacific A +2.9 -3.0
* through Tuesday
Sources: Lipper Analytical Services, Times research
