Latin Finance - May 2008 - 24

markets outlook products,” says Nicolas Aguzin, head of LatAm investment banking at JPMorgan. “There will be a lot more securitizations – not in the next few months, but 4-5 years from now.” Stocks Not Expensive After five years in which equity indices hit new highs, the liquidity crunch has slowed issuance to a trickle. The US could spend the rest of 2008 in a slowdown, Dennis says, but when it re-emerges, LatAm is poised for a bull run. Citi forecasts the Mexico Bolsa finishing 2008 at 35,000 and the Bovespa at 67,000 – from 31,000 and 64,000 mid-April. “There is nothing that is going so fundamentally wrong in the time of global economic weakness that will prevent Latin America from taking part in the next upturn,” says Dennis. Strong commodities and continued sound policies will underpin an improvement, he adds. The favorite sectors are consumer stocks and financials, due to an evolution in domestic demand. “This is not a region where valuations have gone through the roof,” says Dennis. “We think Latin America trades at between 12 and 13 times 2008 earnings. It’s not an expensive part of the world.” Mexico’s challenge is to reform the energy sector, following progress with pensions and other areas. Brazil also has a lot of reform work to do, but it has benefitted more from commodities. Dennis expects increased interest in other markets where fundamentals continue to improve, especially Peru and Colombia, and highlights Argentina as an example of policy restraining development of stock markets. Aguzin sees a pickup in ECM for the remainder of this year and a robust 2009. More importantly, he explains, equity markets will stimulate private investment so essential to developing the region’s economies – especially infrastructure. Private equity has generated buzz in the region in the last few years, with players such as Brazil’s GP investments and deals like General Atlantic’s investment in MercadoLibre. The key question, however, for private equity investors to date has been how they will exit, with M&A a sole alternative. “With the development of the Brazilian capital markets we’ll see a lot more equity activity and this will give a lot more confidence to private equity investors,” Aguzin says. External Storm – Internal Danger Nobody can predict the full effects of the US slowdown, or how long it will last. Virtually all of the region will be hit, especially places like Colombia where there is a high current account deficit. The IIF sees 4.1% GDP growth for the region at the end of 2009, down from 4.4% expected in 2008. “Having high commodity prices is good for net exporters, but it is not without some problems,” says Perry, who predicts a slight decline in commodities in the near term. A particular menace is the old threat: inflation. Growth has dragged up prices, most noticeably in food and energy. Region-wide inflation rose to 6.2% in February, from 5.0% in September, according to the IIF. It is now a greater threat than global economic slowing and tighter credit conditions, says Perry. Central Banks face a tough choice. On the one hand, if they attempt to cap imported inflationary pressures, they create a significant differential of interest rates with the US – which is loosening policy. They would then risk overstimulating net financial inflows and seeing further FX appreciation, which is bad for exports and growth at a time when external demand is weakening. “It’s easy to blame external factors, but there is domestic demand-based inflation as well,” says Paulo Leme, chief economist for emerging markets at Goldman Sachs. Argentina, Venezuela and Brazil are particularly vulnerable. His shop sees inflation for the region picking up to around 6.0% in 2008-2009, from 5.2% per year in 2006-2007. Even more threatening than inflation is opportunity cost of slower GDP growth around 4%, Leme says. He explains that it would be unrealistic to expect the region as a whole to match the double-digit growth of some Asian countries, but it is losing up to two percentage points of expansion by lagging Asia in certain areas, such as saving and production. “It’s striking that we save too little,” Leme says, adding that saving is still too concentrated in the public sector. Correcting this in the coming years might add 50-100 basis points to GDP growth. The region’s production lags as well, and smarter spending on infrastructure and education, along with a renewed commitment to reforms is desperately needed. If these were at Asian levels, he explains, it would be worth another 100150 basis points to GDP. LF 24 LATINFINANCE May 2008
Latin Finance - May 2008

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