But Latin America’s performance is less impressive compared with other emerging markets. In August the MSCI Eastern Europe rose 13% while the MSCI Asia gained 6.7%. But it is also true that since the start of the year the Latin American stockmarkets (32.4%) have enjoyed a better performance than emerging markets in general (28.6%).
Brazil experienced a tremendous gain last month thanks to the recent cut in interest rates. In
effect the central bank’s monetary policy committee decided to reduce interest rate by four percentage points in these last two months, from 26% to 22%. The good news is that the government is gradually moving towards its annual inflation target of 8.5%. This year the MSCI Brazil Index had gained 54.2% as of September 4th and was the best performing country index after Sri Lanka (64.9%) and Venezuela (75.1%).
The Mexican stockmarket in contrast fell 1.7% in August. Although the market had gained 20.2% so far this year as of September 4th this was relatively poor compared with other emerging markets.
One important characteristic of emerging markets in general is the huge importance of the currency effect. A good example of this is Brazil. In local currency terms the Brazil stockmarket index had gained 28% this year as of September 4th compared with a gain in dollar terms of 54%. That is to say that half of the Brazilian stockmarket return has resulted from the currency effect.
Another story
Mexico is another story as its economy is strongly linked to America. As a result the currency effect is not as great. As of September 4th the Mexican peso had lost 4% against the dollar this year.
For most analysts, Brazil continues to exhibit attractive valuations (some experts calculate a price-earnings ratio of only six times for the Brazilian stockmarket) and a cheap currency. Most of them expect more interest rate cuts as economic reform is making good progress. But the government’s main task is still social security reform. Progress in this area would certainly help the Brazilian market.
The Mexican economy is starting to recover following the recovery of its North American neighbour. But in Mexico too some structural reforms (and especially fiscal reform) are necessary.
According to the latest forecasts from the World Bank the region will experience the greatest improvement in growth of any part of the world over the coming year. GDP growth looks set to jump from 1.8% in 2003 to 3.7% in 2004.
In the context of global economic recovery the outperformance of emerging markets is likely to continue. So Latin America funds could be a good source of returns for investors’ portfolios. But it is important to remember that these funds have traditionally been riskier than other emerging market funds. The volatility registered by Latin American funds (29.5% in annual terms in the last three years) has been higher than for Asia ex Japan (22.8%) or emerging European funds (25.1%). But this also means that the possibility of above average returns is higher for those who invest in a Latin America fund.
[Correction made to paragraph on World Bank forecasts on September 11th].
