Risk shifting from Argentina to Brazil

Fernando Luque 6 June, 2002 | 6:15PM
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Brazil, which will have a general election in October, has become the main focus of concern for investors in Latin America.

Investor sentiment

May was a bad month for all the region’s markets with the MSCI Latin America falling by just over 8% in dollar terms. It should be no surprise that Argentina, which is still anxiously awaiting assistance from the International Monetary Fund (IMF), was the worst performing market with a decline of almost 30% over the month.

The region’s problems were not confined to Argentina: all the markets suffered last month. For example, the MSCI Mexico and the M

SCI Chile fell by 8.5% and 6.2% respectively.

But most of the concern is focussed on Brazil. The uncertainty about the future presidential elections, with a victory for the radical Workers Party a distinct possibility, is one of the reasons why Brazil has performed worse than other emerging markets. And whichever party wins the elections the new government will have to deal with a growing burden of public sector debt.

Recently JP Morgan, an investment bank, warned that Brazil could suffer a withdrawal of foreign investment in the coming months. The IMF has also acknowledged that the country could suffer “contagion” from the crisis in Argentina.

The Brazilian real lost 7% against the dollar during this month. At the same time Brazil is being perceived as an increasingly risky market by foreign investors – making it more difficult for the Brazilian central bank to reduce interest rates.

Outlook

There is no doubt that the future election in Brazil will put some pressure on all the Latin American markets and their currencies. But even if May brought losses to all the markets it should not be forgotten that each one has its own peculiarities.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Fernando Luque

Fernando Luque  is Senior Financial Editor at Morningstar Spain 

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