Despite the recent stock market turbulence in countries such as Brazil and Mexico, Latin America remains a very attractive region for investors. Latin American economies place flauvorable positions due to its solid public sector finances, lower fiscal deficits and lower levels of indebtedness. Nevertheless the case for investment in emerging economies still remains compelling.
Over the last few years emerging markets have experienced a fundamental shift away from being highly dependent on exports to the developed world, to becoming economies mainly driven by domestic demand. Although inflation remains an issue across the region, the global downturn and fall in commodity prices should remove some of the inflationary pressures.
Commodity exports considered to be the main dependence of Latin American cover just 10% of Brazilian economy. Brazilian stock market index has a 50% exposure to commodities.
Another key issue to consider is the good health of the domestic banking sector, at a time when global competitors struggle to stay afloat. Recent news about the merger between Ita and Unibanco – Brazil’s third and fourth largest banks show the strength of the sector.
Latin American banks have learnt through bitter experience to be overcapitalised and conservative and therefore they have managed to arrive at this time of turbulence in the banking sector with very solid balance sheets, says Urban Larson, manager, the F&C Latin American Equity Fund. Reserve requirements across the region, in particular in Brazil, are very high and banks are still lending. This is a very big difference with the rest of the world. The merger between Ita and Unibanco will create a real financial powerhouse. Unlike in other markets where banks are being forced to merge out of necessity or desperation, this is a merger originated from a position of strength and, in my opinion, underlines the solidity of the financial system in Brazil, and Latin America in general.
The recent turmoil in the credit markets has had a negative effect in all Latin American countries, resulting in a reduction in credit lines for Latin American exporters and banks and a slowdown in the growth forecast for the region, continues Urban Larson. However we don’t expect to see a deep economic crisis spreading across the continent. With the exception of Mexico, whose economy is more exposed to the US, we think Latin America is well positioned to avoid recession and continue growing, albeit at a slower pace.
L.D.