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The best-kept secret about Latin America's economy is that, in spite of all the disappointing news that have been coming out of the region lately, Latin American investment fund managers have bucked the world trend last year by posting a 7.3 percent average rise in mutual funds based there. In some cases this has not been enough to make up for locals currencies' devaluation against the dollar-Brazilian fund managers increased assets under their management by 15 per cent in local currency terms, but it turned out to be only a minus 1 percent in dollar terms. Nonetheless, even those results are signs of the underlying health of many of the region's economies.
Growth was particularly strong in Mexico, following the passing of a new fund law early last year, according to a study by Latin Asset Management, a New York consultancy, based on mutual fund data from 229 managers in Brazil, Mexico, Argentina, Chile, Peru and Uruguay.
Much of the increase depended on Brazilian fund managers such as Banco do Brasil and Itau Asset Management. The 10 largest managers-nine of which are based in Brazil-control 60 per cent of the combined assets. Among the top 10 are five foreign-owned groups, including holdings by Citigroup Asset Management, HSBC Brain and ABN Amro Asset Management. And in Peru assets more than doubled as investors moved from low-yielding cash deposits to mutual funds. Four Peru-based firms were among the 30 fastest-growing managers.
It is said in investment circles that if you put a little money in emerging markets you should be prepared to a lot of volatility, but you may reap big rewards. The downside is that they tend to be subject to upheavals, both politically and economically, and your investment can expire worthless. On the other hand, emerging stock markets outperformed the big developed stock markets by 17 per cent over a year, and as much as 30 per cent over three years.
The economies of developing countries are highly geared to global growth and the fate of the world's biggest economy, the U.S. The thinking in Wall Street is that, with the U.S. economy in an upturn, this may be a good time to invest in emerging markets. South Korea and Mexico, two of last year's best performing equity markets, have already responded well to recent signs of recovery in the U.S.
Emerging markets are still cheap, says Kate Munday, head of emerging markets at Baring Asset Managers: "Stock markets are trading at a 40 per cent discount to developed markets." The reason is prices have been hit in recent years by a series of high-profile defaults on debt by governments in Mexico, Russia and most recently in Argentina. Nonetheless, "the default risk is 10 times higher in the high-yield corporate bond market than in emerging market debt," notes Jerome Booth at Ashmore Investment Management, an adviser on emerging market debt.
However, among many of the Wall Street investment firms consulted recently, economic analysis of Latin America's emerging markets took second place to political considerations. Most Latin American economies are poised to recover strongly in the second half of this year, according to the International Monetary Fund. Claudio Loser, director of the IMF's western hemisphere department, said the region would benefit from lower financing costs, higher commodity prices and an expected rebound in the U.S. economy. Excluding Argentina, the region is expected to be growing by an annual rate of 4 per cent by the end of this year.
But investors who look at the region are not willing to join in this sweeping statement, grading individual countries according to how they see their political futures.
Among the larger markets, Mexico, Brazil and Chile are in a category by themselves: three countries that are seen as politically stable. The same view is held about four smaller ones: Panama. El Salvador, Bolivia and Uruguay. There is optimism but not certainty about Ecuador, and doubts about Honduras, Nicaragua and Guatemala and Paraguay.
The Wall Street Latin American specialists who offered their opinions-mostly off the record-are in a quandary about Colombia and Peru.
Although the offensive that president Andrιs Pastrana ordered late in February against the terrorist bandits of the Armed Revolutionary Forces of Colombia is seen as a step in the right direction, hopes on that country are on hold until next May's presidential election. The triumph of hard-liner Alvaro Uribe-which is generally expected-would move Colombia to the "maybe" column as an investment destination.
Peru is right now a mix of encouraging economic prospects (official estimates of 3.5-4.0 percent growth this year cannot be easily dismissed) and a discouraging political scene.
Increasingly seen as unable to get a grip on government, populist President Alejandro Toledo, who took office with more than 80 percent approval rate, has slipped down to 25 percent in the eight months since. And it doesn't help that rumors are circulating that Economy Minister Pedro Pablo Kuczynski, a respected former investment banker seen by Wall Street as an anchor of fiscal discipline, might resign.
Then we come to Argentina and Venezuela, two key countries in the hemisphere whose political troubles trump their economic difficulties, particularly in the case of Argentina, whose economy is expected to decline 8.4 percent this year, while private-sector forecasts of Venezuela now expect a 1 per cent decline in economic output, compared with growth of 1.8 per cent three months ago. Opinion in Wall Street about both countries is that they may be again the great markets they used to be, but for now "benign neglect" is advisable.
"The long-term vision of a hemispheric community of mature, developed democracies will not be realized without a sustained focus by the countries themselves on building the institutions that make democracy work," says Eric Farnsworth, Managing Director of Manatt Jones Global Strategies in Washington. "Elections are a critical first step but they are not sufficient. Fundamental reforms are necessary, starting with full implementation of the rule of law and a new sense of civic responsibility. Until fair, impartial judiciaries are in place, contracts are respected by the state and enforced in the courts, regulatory agencies are independent and transparent in their decision-making and corruption is uprooted, foreign investors will remain reluctant to invest.
"Similarly, until endemic tax evasion is reduced and incentives are put in place to mobilize domestic capital formation, as Chile did with ground-breaking social security reform in the 1980s, the region will be unable to sustain the efforts needed to promote the levels of education, healthcare and infrastructure development required for success in the global 21st century."
Claudio Campuzano (claudio-campuzano@hotmail.com) is U.S, correspondent for the Latin American newsweekly Tiempos del Mundo and editorial page editor of the New York daily Noticias del Mundo. He writes weekly for World Tribune.com