"...emerging markets will grow faster than the
developed world for decades to come."

Gideon Rachman, The Financial Times

A new era of maturity and stability for Latin America

Region’s growing strength is evident in the speed of its economic recovery, which was much faster than that of the developed world

Latin America appears poised for a period of sustainable growth, as the region’s traditional high-risk image has been replaced with one of maturity, stability, fiscal discipline, greater trade and financial openness, and improved market-oriented policies. All these combined, analysts say, makes the region more attractive to investors.

“The key driver to Latin America’s resurgence in recent years has been the embracing of fiscal prudence, positive balance of payments and market-economy ideas by countries in the region,” says Mark Mobius, executive chairman of Templeton Asset Management Ltd. in Singapore and lead manager of both Templeton Emerging Markets Fund and Templeton BRIC Corporate Class Fund.

The growing strength of the region’s economies is evident in the speed of their recovery from the recent global financial crisis, which was markedly faster than that of the developed world. According to the International Monetary Fund’s 2010 Regional Economic Outlook, the performance of Latin American countries was better in this crisis than in previous ones because of efforts made over the past decade to strengthen their economies. The report notes that the region’s resilience in withstanding external shocks is a marked departure from past global crises.

Mobius agrees: “[Although] Latin America was affected by the recent credit crunch/financial crisis just as other areas of the world, [the effects were] short-lived once inves-tors realized that the fundamentals in Latin America were quite good. The net effect of the crisis has thus been minimal.”

Arguably, these countries entered the financial crisis with relatively larger foreign-exchange reserves, lower debt ratios, strong current account surpluses and better gross domestic product growth compared with their developed counterparts, which put Latin America in a stronger fiscal position to stage a faster rebound.

Growth forecasts for the region are mixed. The IMF projects that real GDP in the region will grow by 3% in 2010, compared with a contraction of 2.7% in 2009.

The Organization for Economic Co-operation and Development did not provide a precise growth forecast in its 2010 Latin American Economic Outlook, which stated: “The rate of recovery is expected to be substantial in 2010, even if short of the typical growth rates of more than 5% that characterized the bonanza of 2004-08.”

The OECD report added that the region’s economic fundamentals and long-term development goals remain uncompromised in 2010.

“Latin America is benefiting from a strong and quick rebound in commodities prices,” says Timothy Morris, emerging markets portfolio manager with J.P. Morgan Invest-ment Management Inc. in New York, adding that this situation is largely due to stimulus measures in China that have facilitated continued demand for commodities that have allowed prices to rebound.

Brazil, the largest country in Latin America, is a major exporter of both hard and soft commodities, including metals, minerals and oil, as well as agricultural products such as soya beans, which have benefited from rising prices due to huge demand from India and China, says Bob Gorman, vice president and chief portfolio strategist with TD Waterhouse Canada Inc. in Toronto. Other countries in the region, including Chile, Peru and Colombia, are also beneficiaries of the commodities boom.

Improved fundamentals in Latin America have put the region in a positive light. “For years,” says Gorman, “it was a truism in the investment business that you never bought Latin America for the long term, but rather as a cyclical play.”

However, he suggests, this view has changed and the region now constitutes as much as 25% of global portfolios, way up from a meagre 2% not so long ago.

“The most important developments have taken place in the region’s largest economy, Brazil,” says Mobius. “The buildup of foreign reserves and the balancing of government budgets [across the region also] have resulted in increased trust [by] both domestic and international investors; interest rates have declined and the spread between interest rates for Latin American countries’ debts and U.S. Treasuries has also declined — evidence of an increase in confidence.”

With the markets being fuelled by both international and domestic fund flows, the MSCI Latin America index was up by 92.1% in U.S.-dollar terms for the year ended March 31, outperforming all other MSCI indices. Colombia, with its gain of 117.1%, was the best-performing country for the period.

Latin America has also significantly outperformed all other regions over the three-, five- and 10-year periods ended March 31, based on MSCI annualized historical returns. For example, Asia, traditionally the most popular emerging region among investors, was up by 3.1%, 11.4% and 4.6%, respectively, vs 9.7%, 22.5% and 13.7% for Latin America.

Dwarka Lakhan

Dwarka Lakhan

Dwarka Lakhan is a pioneer in emerging markets journalism in Canada. His first emerging markets article, “Africa Joins Ranks of the Emerging,” appeared in Investment Executive, Canada’s leading newspaper for financial advisors, in September 1994. Since then he has written hundreds of articles on the full spectrum of emerging markets and has conducted more than two thousand interviews with emerging and frontier markets investment professionals.


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