Latin Finance - November 2008 - 63

Inside source How LatAm Benefits From the Crisis What is the impact of the global crisis on LatAm? Fundamentally the risk perception of the US has changed. The idea that US assets are risk free is clearly nonsense. What we’re seeing is the developed markets starting to price risk in a way that has been familiar and common in emerging markets for a long time. That makes emerging markets look relatively attractive. Risk perception – developed versus developing countries – has changed dramatically and irreversibly. Other developing countries with big reserves, in Asia and the Middle East, will want to sell their dollars and put money in Latin American. The sovereign wealth funds and the Chinese and others who want to secure real assets will be investing across the whole region. I’m not saying that emerging markets aren’t risky, I’m saying that all markets are risky, and that’s the radical statement. This is exactly the time when you have to think much more longer term. Jerome Booth LatAm will be a leading beneficiary of asset reallocation once the post-crisis dust settles, according to Jerome Booth, head of research at UK-based Ashmore Investment Management, which controls $32 billion in assets. He was speaking mid-October, after Ashmore announced that it had lost 14.7% of assets under management in the third quarter. What is the exchange rate outlook? The first thing I’m really bullish on is currencies – the more that the dollar strengthens short term, the more it’s going to spring back the other way, and the better the opportunity. What do you make of ongoing corporate trouble? It’s a few cases, there’s always going to be problems. There’s a difference between individual companies and stories and systemic risk, particularly systemic sovereign risk or systemic banking sector risk. There’s a huge gulf between Latin America and Europe in those respects. It’s not a systemic banking sector problem we’ve got, and that’s a fundamental difference. What we’ve got basically at the corporate level and the sovereign level is distressed sellers, not distressed fundamentals. How has sovereign default risk altered? How should investors reposition? The number one, most important medium term impact of the credit crunch on Latin America will be through asset allocation. Emerging markets will be 50% of global GDP at market prices probably in 15 years, it’s 30% now, and in purchasing power parity it’s over 50% now. The average liability of a pension fund in Western Europe, United States, and Japan, is 15 years. There’s an argument to say they should be 50% invested in emerging market asset classes today. One can make a case for being 35% in emerging markets, but I think one actually has to make a case for being less than 35%. As a pension fund, you’re going to have to justify why you are seriously underweight in future. I seriously don’t think in Latin American the sovereign default risk has increased in any country. The only exception is Ecuador, because of the oil price, which I believe is temporary and I think will go back up again. Brazil has lower default risk than several countries in Southern Europe: insignificant sovereign default risk. There are some countries that are going to have serious problems. Frankly, not in Latin America. We’re talking about Latvia, and Serbia, Ukraine and Pakistan. The risks in those countries in Latin America that have sovereign risk – those risks were there before the credit crunch. I don’t think it has actually increased the risk of default in Argentina substantially, at all. If anything, it’s the other way round. Argentina is now in the market for selling real assets to the Chinese and to other big sources of new capital. They are cleaning the slate, welcoming new investment. This is not recession. You don’t just go from huge growth to nothing – it just doesn’t happen that way. It’s a completely different order of magnitude. The main risks lie in the banking sectors, which is not significantly a Latin American problem, it’s an Eastern European problem. What is the outlook for commodities? The credit crunch has temporarily set [the rally that started in 2002] back because demand for commodities in the developed world has fallen off a cliff. The trend is still up. If China grows at 10% again, it’s going to come up much sooner and inflation is going to be exported to the US again. Latin America is a beneficiary, more than some other emerging market regions, of the commodity terms of trade. How are you positioning in these markets? We have been buying assets the last few weeks, actively trading 2008 November LATINFINANCE 63

Latin Finance - November 2008

Table of Contents for the Digital Edition of Latin Finance - November 2008