Tiny Latin America Markets Hold Their Own

Sometimes it pays to be small and live in out-of-the-way places.

While Sao Paulo’s Bovespa index has plunged 42% in dollar terms this year as foreign investors fled Latin America’s biggest market, 3,200 miles to the northwest in Panama City the general index has jumped 56%. Perhaps more impressive, the Panama index has scarcely dipped in recent weeks as emerging markets worldwide took a nose dive.

The same pattern holds in Costa Rica, Guatemala and El Salvador, all of whose markets have climbed since the beginning of the year.

“Overall, Central America and Panama are providing a safe harbor in world financial markets,” said Antonio Villamil, president of the Washington Economics Group, a consulting firm in Miami.

These tiny markets are thriving on the absence of foreign investors. Their shareholders are mostly locals who are comfortable in the knowledge they understand local prospects and see no reason to panic because of events an ocean away. No worry here over what might happen if China devalues the yuan.

“It’s not like in Brazil or Mexico, where large amounts of foreign money have come in, and then left, because of the problems in Russia and Asia,” said Raul Lacayo, president of the Nicaraguan Securities Exchange.

Stocks in Costa Rica have risen 100% in 1998 in dollar terms, according to an index compiled by Costa Rica’s BCT Valores brokerage, making it the world’s best-performing index so far this year, according to Bloomberg data. Panama’s general stock index is up 56.5%, ranking it No. 2.

Meanwhile, Central America’s richer neighbors are languishing. Chile, Brazil, Venezuela, Colombia, Mexico and Argentina are home to six of the world’s 10-worst-performing markets, soured by concern about weakening Asian currencies, falling oil prices and Russia’s decision last month to devalue its currency and default on its ruble debt.

There’s one very good reason why big foreign investors shun Central American markets--they’re too small.

Foreign institutions typically buy and sell large amounts of shares and may need to get into or out of a stock quickly. That’s not an option in a small market where trading volume is low.

Much of this year’s gains stem from local optimism about the region’s growth prospects.

“We are entering a period of peace, of stability, of democracy,” Nicaragua’s Lacayo said. “With that stability now you can see a discrepancy in price [between Central America and South America] and in relative returns.”